Berkshire's Corporate Performance vs. the S&P 500
| Year | Annual Percentage Change | Relative Results (1)-(2) | ||
| in Per-Share Book Value of Berkshire (1) | in S&P 500 with Dividends Included (2) | |||
| 1965 | ...... | 23.8 | 10.0 | 13.8 |
| 1966 | ...... | 20.3 | (11.7) | 32.0 |
| 1967 | ...... | 11.0 | 30.9 | (19.9) |
| 1968 | ...... | 19.0 | 11.0 | 8.0 |
| 1969 | ...... | 16.2 | (8.4) | 24.6 |
| 1970 | ...... | 12.0 | 3.9 | 8.1 |
| 1971 | ...... | 16.4 | 14.6 | 1.8 |
| 1972 | ...... | 21.7 | 18.9 | 2.8 |
| 1973 | ...... | 4.7 | (14.8) | 19.5 |
| 1974 | ...... | 5.5 | (26.4) | 31.9 |
| 1975 | ...... | 21.9 | 37.2 | (15.3) |
| 1976 | ...... | 59.3 | 23.6 | 35.7 |
| 1977 | ...... | 31.9 | (7.4) | 39.3 |
| 1978 | ...... | 24.0 | 6.4 | 17.6 |
| 1979 | ...... | 35.7 | 18.2 | 17.5 |
| 1980 | ...... | 19.3 | 32.3 | (13.0) |
| 1981 | ...... | 31.4 | (5.0) | 36.4 |
| 1982 | ...... | 40.0 | 21.4 | 18.6 |
| 1983 | ...... | 32.3 | 22.4 | 9.9 |
| 1984 | ...... | 13.6 | 6.1 | 7.5 |
| 1985 | ...... | 48.2 | 31.6 | 16.6 |
| 1986 | ...... | 26.1 | 18.6 | 7.5 |
| 1987 | ...... | 19.5 | 5.1 | 14.4 |
| 1988 | ...... | 20.1 | 16.6 | 3.5 |
| 1989 | ...... | 44.4 | 31.7 | 12.7 |
| 1990 | ...... | 7.4 | (3.1) | 10.5 |
| 1991 | ...... | 39.6 | 30.5 | 9.1 |
| 1992 | ...... | 20.3 | 7.6 | 12.7 |
| 1993 | ...... | 14.3 | 10.1 | 4.2 |
| 1994 | ...... | 13.9 | 1.3 | 12.6 |
| 1995 | ...... | 43.1 | 37.6 | 5.5 |
| 1996 | ...... | 31.8 | 23.0 | 8.8 |
| 1997 | ...... | 34.1 | 33.4 | .7 |
| 1998 | ...... | 48.3 | 28.6 | 19.7 |
| 1999 | ...... | .5 | 21.0 | (20.5) |
| 2000 | ...... | 6.5 | (9.1) | 15.6 |
| 2001 | ...... | (6.2) | (11.9) | 5.7 |
| 2002 | ...... | 10.0 | (22.1) | 32.1 |
| 2003 | ...... | 21.0 | 28.7 | (7.7) |
| 2004 | ...... | 10.5 | 10.9 | (.4) |
| 2005 | ...... | 6.4 | 4.9 | 1.5 |
| Average Annual Gain — 1965-2005 | 21.5 | 10.3 | 11.2 | |
| Overall Gain — 1964-2005 | 305,134 | 5,583 | ||
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2005 was \$5.6 billion, which increased the per-share book value of both our Class A and Class B stock by 6.4%. Over the last 41 years (that is, since present management took over) book value has grown from \$19 to \$59,377, a rate of 21.5% compounded annually.*
Berkshire had a decent year in 2005. We initiated five acquisitions (two of which have yet to close) and most of our operating subsidiaries prospered. Even our insurance business in its entirety did well, though Hurricane Katrina inflicted record losses on both Berkshire and the industry. We estimate our loss from Katrina at \$2.5 billion – and her ugly sisters, Rita and Wilma, cost us an additional \$.9 billion.
Credit GEICO – and its brilliant CEO, Tony Nicely – for our stellar insurance results in a disaster-ridden year. One statistic stands out: In just two years, GEICO improved its productivity by 32%. Remarkably, employment fell by 4% even as policy count grew by 26% – and more gains are in store. When we drive unit costs down in such a dramatic manner, we can offer ever-greater value to our customers. The payoff: Last year, GEICO gained market-share, earned commendable profits and strengthened its brand. If you have a new son or grandson in 2006, name him Tony.
* * * * * * * * * * *
My goal in writing this report is to give you the information you need to estimate Berkshire's intrinsic value. I say “estimate” because calculations of intrinsic value, though all-important, are necessarily imprecise and often seriously wrong. The more uncertain the future of a business, the more possibility there is that the calculation will be wildly off-base. (For an explanation of intrinsic value, see pages 77 – 78.) Here Berkshire has some advantages: a wide variety of relatively-stable earnings streams, combined with great liquidity and minimum debt. These factors mean that Berkshire's intrinsic value can be more precisely calculated than can the intrinsic value of most companies.
Yet if precision is aided by Berkshire's financial characteristics, the job of calculating intrinsic value has been made more complex by the mere presence of so many earnings streams. Back in 1965, when we owned only a small textile operation, the task of calculating intrinsic value was a snap. Now we own 68 distinct businesses with widely disparate operating and financial characteristics. This array of unrelated enterprises, coupled with our massive investment holdings, makes it impossible for you to simply examine our consolidated financial statements and arrive at an informed estimate of intrinsic value.
We have attempted to ease this problem by clustering our businesses into four logical groups, each of which we discuss later in this report. In these discussions, we will provide the key figures for both the group and its important components. Of course, the value of Berkshire may be either greater or less than the sum of these four parts. The outcome depends on whether our many units function better or worse by being part of a larger enterprise and whether capital allocation improves or deteriorates when it is under the direction of a holding company. In other words, does Berkshire ownership bring anything to the party, or would our shareholders be better off if they directly owned shares in each of our 68 businesses? These are important questions but ones that you will have to answer for yourself.
Before we look at our individual businesses, however, let's review two sets of figures that show where we've come from and where we are now. The first set is the amount of investments (including cash and cash-equivalents) we own on a per-share basis. In making this calculation, we exclude investments held in our finance operation because these are largely offset by borrowings:
| Year | Per-Share Investments* |
| 1965 | $4 |
| 1975 | 159 |
| 1985 | 2,407 |
| 1995 | 21,817 |
| 2005 | $74,129 |
| Compound Growth Rate 1965-2005 | 28.0% |
| Compound Growth Rate 1995-2005 | 13.0% |
| *Net of minority interests | |
In addition to these marketable securities, which with minor exceptions are held in our insurance companies, we own a wide variety of non-insurance businesses. Below, we show the pre-tax earnings (excluding goodwill amortization) of these businesses, again on a per-share basis:
| Year | Per-Share Earnings* |
| 1965 | $ 4 |
| 1975 | 4 |
| 1985 | 52 |
| 1995 | 175 |
| 2005 | $2,441 |
| Compound Growth Rate 1965-2005 | 17.2% |
| Compound Growth Rate 1995-2005 | 30.2% |
*Pre-tax and net of minority interests
When growth rates are under discussion, it will pay you to be suspicious as to why the beginning and terminal years have been selected. If either year was aberrational, any calculation of growth will be distorted. In particular, a base year in which earnings were poor can produce a breathtaking, but meaningless, growth rate. In the table above, however, the base year of 1965 was abnormally good; Berkshire earned more money in that year than it did in all but one of the previous ten.
As you can see from the two tables, the comparative growth rates of Berkshire's two elements of value have changed in the last decade, a result reflecting our ever-increasing emphasis on business acquisitions. Nevertheless, Charlie Munger, Berkshire's Vice Chairman and my partner, and I want to increase the figures in both tables. In this ambition, we hope – metaphorically – to avoid the fate of the elderly couple who had been romantically challenged for some time. As they finished dinner on their 50 $^{th}$ anniversary, however, the wife – stimulated by soft music, wine and candlelight – felt a long-absent tickle and demurely suggested to her husband that they go upstairs and make love. He agonized for a moment and then replied, “I can do one or the other, but not both.”
Acquisitions
Over the years, our current businesses, in aggregate, should deliver modest growth in operating earnings. But they will not in themselves produce truly satisfactory gains. We will need major acquisitions to get that job done.
In this quest, 2005 was encouraging. We agreed to five purchases: two that were completed last year, one that closed after yearend and two others that we expect to close soon. None of the deals involve the issuance of Berkshire shares. That's a crucial, but often ignored, point: When a management proudly acquires another company for stock, the shareholders of the acquirer are concurrently selling part of their interest in everything they own. I've made this kind of deal a few times myself – and, on balance, my actions have cost you money.
Here are last year's purchases:
- On June 30 we bought Medical Protective Company (“MedPro”), a 106-year-old medical malpractice insurer based in Fort Wayne. Malpractice insurance is tough to underwrite and has proved to be a graveyard for many insurers. MedPro nevertheless should do well. It will have the attitudinal advantage that all Berkshire insurers share, wherein underwriting discipline trumps all other goals. Additionally, as part of Berkshire, MedPro has financial strength far exceeding that of its competitors, a quality assuring doctors that long-to-settle claims will not end up back on their doorstep because their insurer failed. Finally, the company has a smart and energetic CEO, Tim Kenesey, who instinctively thinks like a Berkshire manager.
- Forest River, our second acquisition, closed on August 31. A couple of months earlier, on June 21, I received a two-page fax telling me – point by point – why Forest River met the acquisition criteria we set forth on page 25 of this report. I had not before heard of the company, a recreational vehicle manufacturer with \$1.6 billion of sales, nor of Pete Liegl, its owner and manager. But the fax made sense, and I immediately asked for more figures. These came the next morning, and that afternoon I made Pete an offer. On June 28, we shook hands on a deal.
Pete is a remarkable entrepreneur. Some years back, he sold his business, then far smaller than today, to an LBO operator who promptly began telling him how to run the place. Before long, Pete left, and the business soon sunk into bankruptcy. Pete then repurchased it. You can be sure that I won't be telling Pete how to manage his operation.
Forest River has 60 plants, 5,400 employees and has consistently gained share in the RV business, while also expanding into other areas such as boats. Pete is 61 – and definitely in an acceleration mode. Read the piece from RV Business that accompanies this report, and you’ll see why Pete and Berkshire are made for each other.
- On November 12, 2005, an article ran in The Wall Street Journal dealing with Berkshire’s unusual acquisition and managerial practices. In it Pete declared, “It was easier to sell my business than to renew my driver’s license.”
In New York, Cathy Baron Tamraz read the article, and it struck a chord. On November 21, she sent me a letter that began, “As president of Business Wire, I’d like to introduce you to my company, as I believe it fits the profile of Berkshire Hathaway subsidiary companies as detailed in a recent Wall Street Journal article.”
By the time I finished Cathy's two-page letter, I felt Business Wire and Berkshire were a fit. I particularly liked her penultimate paragraph: “We run a tight ship and keep unnecessary spending under wraps. No secretaries or management layers here. Yet we’ll invest big dollars to gain a technological advantage and move the business forward.”
I promptly gave Cathy a call, and before long Berkshire had reached agreement with Business Wire's controlling shareholder, Lorry Lokey, who founded the company in 1961 (and who had just made Cathy CEO). I love success stories like Lorry's. Today 78, he has built a company that disseminates information in 150 countries for 25,000 clients. His story, like those of many entrepreneurs who have selected Berkshire as a home for their life's work, is an example of what can happen when a good idea, a talented individual and hard work converge.
- In December we agreed to buy 81% of Applied Underwriters, a company that offers a combination of payroll services and workers' compensation insurance to small businesses. A majority of Applied's customers are located in California.
In 1998, though, when the company had 12 employees, it acquired an Omaha-based operation with 24 employees that offered a somewhat-similar service. Sid Ferenc and Steve Menzies, who have built Applied's remarkable business, concluded that Omaha had many advantages as an operational base – a brilliant insight, I might add – and today 400 of the company's 479 employees are located here.
Less than a year ago, Applied entered into a large reinsurance contract with Ajit Jain, the extraordinary manager of National Indemnity's reinsurance division. Ajit was impressed by Sid and Steve, and they liked Berkshire's method of operation. So we decided to join forces. We are pleased that Sid and Steve retain $19\%$ of Applied. They started on a shoestring only 12 years ago, and it will be fun to see what they can accomplish with Berkshire's backing.
- Last spring, MidAmerican Energy, our 80.5% owned subsidiary, agreed to buy PacifiCorp, a major electric utility serving six Western states. An acquisition of this sort requires many regulatory approvals, but we’ve now obtained these and expect to close this transaction soon. Berkshire will then buy \$3.4 billion of MidAmerican’s common stock, which MidAmerican will supplement with \$1.7 billion of borrowing to complete the purchase. You can’t expect to earn outsized profits in regulated utilities, but the industry offers owners the opportunity to deploy large sums at fair returns – and therefore, it makes good sense for Berkshire. A few years back, I said that we hoped to make some very large purchases in the utility field. Note the plural – we’ll be looking for more.
In addition to buying these new operations, we continue to make “bolt-on” acquisitions. Some aren’t so small: Shaw, our carpet operation, spent about \$550 million last year on two purchases that furthered its vertical integration and should improve its profit margin in the future. XTRA and Clayton Homes also made value-enhancing acquisitions.
Unlike many business buyers, Berkshire has no “exit strategy.” We buy to keep. We do, though, have an entrance strategy, looking for businesses in this country or abroad that meet our six criteria and are available at a price that will produce a reasonable return. If you have a business that fits, give me a call. Like a hopeful teenage girl, I’ll be waiting by the phone.
Insurance
Let's now talk about our four sectors and start with insurance, our core business. What counts here is the amount of “float” and its cost over time.
For new readers, let me explain. “Float” is money that doesn’t belong to us but that we temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we provide – insurance protection – is delivered over a period that usually covers a year and; (2) loss events that occur today do not always result in our immediately paying claims, because it sometimes takes many years for losses to be reported (asbestos losses would be an example), negotiated and settled. The \$20 million of float that came with our 1967 entry into insurance has now increased – both by way of internal growth and acquisitions – to \$49 billion.
Float is wonderful – if it doesn't come at a high price. Its cost is determined by underwriting results, meaning how the expenses and losses we will ultimately pay compare with the premiums we have received. When an insurer earns an underwriting profit – as has been the case at Berkshire in about half of the 39 years we have been in the insurance business – float is better than free. In such years, we are actually paid for holding other people's money. For most insurers, however, life has been far more difficult: In aggregate, the property-casualty industry almost invariably operates at an underwriting loss. When that loss is large, float becomes expensive, sometimes devastatingly so.
In 2004 our float cost us less than nothing, and I told you that we had a chance – absent a mega-catastrophe – of no-cost float in 2005. But we had the mega-cat, and as a specialist in that coverage, Berkshire suffered hurricane losses of \$3.4 billion. Nevertheless, our float was costless in 2005 because of the superb results we had in our other insurance activities, particularly at GEICO.
* * * * * * * * * * * *
Auto policies in force grew by 12.1% at GEICO, a gain increasing its market share of U.S. private passenger auto business from about 5.6% to about 6.1%. Auto insurance is a big business: Each share-point equates to \$1.6 billion in sales.
While our brand strength is not quantifiable, I believe it also grew significantly. When Berkshire acquired control of GEICO in 1996, its annual advertising expenditures were \$31 million. Last year we were up to \$502 million. And I can’t wait to spend more.
Our advertising works because we have a great story to tell: More people can save money by insuring with us than is the case with any other national carrier offering policies to all comers. (Some specialized auto insurers do particularly well for applicants fitting into their niches; also, because our national competitors use rating systems that differ from ours, they will sometimes beat our price.) Last year, we achieved by far the highest conversion rate – the percentage of internet and phone quotes turned into sales – in our history. This is powerful evidence that our prices are more attractive relative to the competition than ever before. Test us by going to GEICO.com or by calling 800-847-7536. Be sure to indicate you are a shareholder because that fact will often qualify you for a discount.
I told you last year about GEICO's entry into New Jersey in August, 2004. Drivers in that state love us. Our retention rate there for new policyholders is running higher than in any other state, and by sometime in 2007, GEICO is likely to become the third largest auto insurer in New Jersey. There, as elsewhere, our low costs allow low prices that lead to steady gains in profitable business.
That simple formula immediately impressed me 55 years ago when I first discovered GEICO. Indeed, at age 21, I wrote an article about the company – it’s reproduced on page 24 – when its market value was \$7 million. As you can see, I called GEICO “The Security I Like Best.” And that’s what I still call it.
* * * * * * * * * * * *
We have major reinsurance operations at General Re and National Indemnity. The former is run by Joe Brandon and Tad Montross, the latter by Ajit Jain. Both units performed well in 2005 considering the extraordinary hurricane losses that battered the industry.
It's an open question whether atmospheric, oceanic or other causal factors have dramatically changed the frequency or intensity of hurricanes. Recent experience is worrisome. We know, for instance, that in the 100 years before 2004, about 59 hurricanes of Category 3 strength, or greater, hit the Southeastern and Gulf Coast states, and that only three of these were Category 5s. We further know that in 2004 there were three Category 3 storms that hammered those areas and that these were followed by four more in 2005, one of them, Katrina, the most destructive hurricane in industry history. Moreover, there were three Category 5s near the coast last year that fortunately weakened before landfall.
Was this onslaught of more frequent and more intense storms merely an anomaly? Or was it caused by changes in climate, water temperature or other variables we don't fully understand? And could these factors be developing in a manner that will soon produce disasters dwarfing Katrina?
Joe, Ajit and I don't know the answer to these all-important questions. What we do know is that our ignorance means we must follow the course prescribed by Pascal in his famous wager about the existence of God. As you may recall, he concluded that since he didn't know the answer, his personal gain/loss ratio dictated an affirmative conclusion.
So guided, we've concluded that we should now write mega-cat policies only at prices far higher than prevailed last year – and then only with an aggregate exposure that would not cause us distress if shifts in some important variable produce far more costly storms in the near future. To a lesser degree, we felt this way after 2004 – and cut back our writings when prices didn't move. Now our caution has intensified. If prices seem appropriate, however, we continue to have both the ability and the appetite to be the largest writer of mega-cat coverage in the world.
* * * * * * * * * * * *
Our smaller insurers, with MedPro added to the fold, delivered truly outstanding results last year. However, what you see in the table below does not do full justice to their performance. That's because we increased the loss reserves of MedPro by about \$125 million immediately after our purchase.
No one knows with any precision what amount will be required to pay the claims we inherited. Medical malpractice insurance is a “long-tail” line, meaning that claims often take many years to settle. In addition, there are other losses that have occurred, but that we won’t even hear about for some time. One thing, though, we have learned – the hard way – after many years in the business: Surprises in insurance are far from symmetrical. You are lucky if you get one that is pleasant for every ten that go the other way. Too often, however, insurers react to looming loss problems with optimism. They behave like the fellow in a switchblade fight who, after his opponent has taken a mighty swipe at his throat, exclaimed, “You never touched me.” His adversary’s reply: “Just wait until you try to shake your head.”
Excluding the reserves we added for prior periods, MedPro wrote at an underwriting profit. And our other primary companies, in aggregate, had an underwriting profit of \$324 million on \$1,270 million of volume. This is an extraordinary result, and our thanks go to Rod Eldred of Berkshire Hathaway Homestate Companies, John Kizer of Central States Indemnity, Tom Nerney of U. S. Liability, Don Towle of Kansas Bankers Surety and Don Wurster of National Indemnity.
Here's the overall tally on our underwriting and float for each major sector of insurance:
| (in $ millions) | ||||
| Underwriting Profit (Loss) | Yearend Float | |||
| Insurance Operations | 2005 | 2004 | 2005 | 2004 |
| General Re...... | $( 334) | $ 3 | $22,920 | $23,120 |
| B-H Reinsurance...... | (1,069) | 417 | 16,233 | 15,278 |
| GEICO...... | 1,221 | 970 | 6,692 | 5,960 |
| Other Primary...... | 235* | 161 | 3,442 | 1,736 |
| Total...... | $ 53 | $1,551 | $49,287 | $46,094 |
*Includes MedPro from June 30, 2005.
Regulated Utility Business
We have an 80.5% (fully diluted) interest in MidAmerican Energy Holdings, which owns a wide variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose 3.7 million electric customers make it the third largest distributor of electricity in the U.K.; (2) MidAmerican Energy, which serves 706,000 electric customers, primarily in Iowa; and (3) Kern River and Northern Natural pipelines, which carry 7.8% of the natural gas consumed in the U.S. When our PacifiCorp acquisition closes, we will add 1.6 million electric customers in six Western states, with Oregon and Utah providing us the most business. This transaction will increase MidAmerican's revenues by \$3.3 billion and its assets by \$14.1 billion.
The Public Utility Holding Company Act (“PUHCA”) was repealed on August 8, 2005, a milestone that allowed Berkshire to convert its MidAmerican preferred stock into voting common shares on February 9, 2006. This conversion ended a convoluted corporate arrangement that PUHCA had forced upon us. Now we have 83.4% of both the common stock and the votes at MidAmerican, which allows us to consolidate the company’s income for financial accounting and tax purposes. Our true economic interest, however, is the aforementioned 80.5%, since there are options outstanding that are sure to be exercised within a few years and that upon exercise will dilute our ownership.
Though our voting power has increased dramatically, the dynamics of our four-party ownership have not changed at all. We view MidAmerican as a partnership among Berkshire, Walter Scott, and two terrific managers, Dave Sokol and Greg Abel. It’s unimportant how many votes each party has; we will make major moves only when we are unanimous in thinking them wise. Five years of working with Dave, Greg and Walter have underscored my original belief: Berkshire couldn’t have better partners.
You will notice that this year we have provided you with two balance sheets, one representing our actual figures per GAAP on December 31, 2005 (which does not consolidate MidAmerican) and one that reflects the subsequent conversion of our preferred. All future financial reports of Berkshire will include MidAmerican's figures.
Somewhat incongruously, MidAmerican owns the second largest real estate brokerage firm in the U.S. And it's a gem. The parent company's name is HomeServices of America, but our 19,200 agents operate through 18 locally-branded firms. Aided by three small acquisitions, we participated in \$64 billion of transactions last year, up 6.5% from 2004.
Currently, the white-hot market in residential real estate of recent years is cooling down, and that should lead to additional acquisition possibilities for us. Both we and Ron Peltier, the company's CEO, expect HomeServices to be far larger a decade from now.
Here are some key figures on MidAmerican's operations:
| Earnings (in $ millions) | ||
| 2005 | 2004 | |
| U.K. utilities | $308 | $326 |
| Iowa utility | 288 | 268 |
| Pipelines | 309 | 288 |
| HomeServices | 148 | 130 |
| Other (net) | 107 | 172 |
| Income (loss) from discontinued zinc project | 8 | (579) |
| Earnings before corporate interest and taxes | 1,168 | 605 |
| Interest, other than to Berkshire | (200) | (212) |
| Interest on Berkshire junior debt | (157) | (170) |
| Income tax | (248) | (53) |
| Net earnings | $563 | $170 |
| Earnings applicable to Berkshire* | $523 | $237 |
| Debt owed to others | 10,296 | 10,528 |
| Debt owed to Berkshire | 1,289 | 1,478 |
*Includes interest earned by Berkshire (net of related income taxes) of \$102 in 2005 and \$110 in 2004.
Finance and Financial Products
The star of our finance sector is Clayton Homes, masterfully run by Kevin Clayton. He does not owe his brilliant record to a rising tide: The manufactured-housing business has been disappointing since Berkshire purchased Clayton in 2003. Industry sales have stagnated at 40-year lows, and the recent uptick from Katrina-related demand will almost certainly be short-lived. In recent years, many industry participants have suffered losses, and only Clayton has earned significant money.
In this brutal environment Clayton has bought a large amount of manufactured-housing loans from major banks that found them unprofitable and difficult to service. Clayton’s operating expertise and Berkshire’s financial resources have made this an excellent business for us and one in which we are preeminent. We presently service \$17 billion of loans, compared to \$5.4 billion at the time of our purchase. Moreover, Clayton now owns \$9.6 billion of its servicing portfolio, a position built up almost entirely since Berkshire entered the picture.
To finance this portfolio, Clayton borrows money from Berkshire, which in turn borrows the same amount publicly. For the use of its credit, Berkshire charges Clayton a one percentage-point markup on its borrowing cost. In 2005, the cost to Clayton for this arrangement was \$83 million. That amount is included in “Other” income in the table on the facing page, and Clayton’s earnings of \$416 million are after deducting this payment.
On the manufacturing side, Clayton has also been active. To its original base of twenty plants, it first added twelve more in 2004 by way of the bankruptcy purchase of Oakwood, which just a few years earlier was one of the largest companies in the business. Then in 2005 Clayton purchased Karsten, a four-plant operation that greatly strengthens Clayton's position on the West Coast.
* * * * * * * * * * * *
Long ago, Mark Twain said: “A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.” If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.
We lost \$104 million pre-tax last year in our continuing attempt to exit Gen Re’s derivative operation. Our aggregate losses since we began this endeavor total \$404 million.
Originally we had 23,218 contracts outstanding. By the start of 2005 we were down to 2,890. You might expect that our losses would have been stemmed by this point, but the blood has kept flowing. Reducing our inventory to 741 contracts last year cost us the \$104 million mentioned above.
Remember that the rationale for establishing this unit in 1990 was Gen Re's wish to meet the needs of insurance clients. Yet one of the contracts we liquidated in 2005 had a term of 100 years! It's difficult to imagine what “need” such a contract could fulfill except, perhaps, the need of a compensation-conscious trader to have a long-dated contract on his books. Long contracts, or alternatively those with multiple variables, are the most difficult to mark to market (the standard procedure used in accounting for derivatives) and provide the most opportunity for “imagination” when traders are estimating their value. Small wonder that traders promote them.
A business in which huge amounts of compensation flow from assumed numbers is obviously fraught with danger. When two traders execute a transaction that has several, sometimes esoteric, variables and a far-off settlement date, their respective firms must subsequently value these contracts whenever they calculate their earnings. A given contract may be valued at one price by Firm A and at another by Firm B. You can bet that the valuation differences – and I’m personally familiar with several that were huge – tend to be tilted in a direction favoring higher earnings at each firm. It’s a strange world in which two parties can carry out a paper transaction that each can promptly report as profitable.
I dwell on our experience in derivatives each year for two reasons. One is personal and unpleasant. The hard fact is that I have cost you a lot of money by not moving immediately to close down
Gen Re's trading operation. Both Charlie and I knew at the time of the Gen Re purchase that it was a problem and told its management that we wanted to exit the business. It was my responsibility to make sure that happened. Rather than address the situation head on, however, I wasted several years while we attempted to sell the operation. That was a doomed endeavor because no realistic solution could have extricated us from the maze of liabilities that was going to exist for decades. Our obligations were particularly worrisome because their potential to explode could not be measured. Moreover, if severe trouble occurred, we knew it was likely to correlate with problems elsewhere in financial markets.
So I failed in my attempt to exit painlessly, and in the meantime more trades were put on the books. Fault me for dithering. (Charlie calls it thumb-sucking.) When a problem exists, whether in personnel or in business operations, the time to act is now.
The second reason I regularly describe our problems in this area lies in the hope that our experiences may prove instructive for managers, auditors and regulators. In a sense, we are a canary in this business coal mine and should sing a song of warning as we expire. The number and value of derivative contracts outstanding in the world continues to mushroom and is now a multiple of what existed in 1998, the last time that financial chaos erupted.
Our experience should be particularly sobering because we were a better-than-average candidate to exit gracefully. Gen Re was a relatively minor operator in the derivatives field. It has had the good fortune to unwind its supposedly liquid positions in a benign market, all the while free of financial or other pressures that might have forced it to conduct the liquidation in a less-than-efficient manner. Our accounting in the past was conventional and actually thought to be conservative. Additionally, we know of no bad behavior by anyone involved.
It could be a different story for others in the future. Imagine, if you will, one or more firms (troubles often spread) with positions that are many multiples of ours attempting to liquidate in chaotic markets and under extreme, and well-publicized, pressures. This is a scenario to which much attention should be given now rather than after the fact. The time to have considered – and improved – the reliability of New Orleans’ levees was before Katrina.
When we finally wind up Gen Re Securities, my feelings about its departure will be akin to those expressed in a country song, “My wife ran away with my best friend, and I sure miss him a lot.”
* * * * * * * * * * * *
Below are the results of our various finance and financial products activities:
| (in $ millions) | ||||
| Pre-Tax Earnings | Interest-Bearing Liabilities | |||
| 2005 | 2004 | 2005 | 2004 | |
| Trading – ordinary income | $ 200 | $ 264 | $1,061 | $5,751 |
| Gen Re Securities (loss) | (104) | (44) | 2,617* | 5,437* |
| Life and annuity operation | 11 | (57) | 2,461 | 2,467 |
| Value Capital (loss) | (33) | 30 | N/A | N/A |
| Leasing operations | 173 | 92 | 370 | 391 |
| Manufactured-housing finance (Clayton) | 416 | 192 | 9,299 | 3,636 |
| Other | 159 | 107 | N/A | N/A |
| Income before capital gains | 822 | 584 | ||
| Trading – capital gains (losses) | (234) | 1,750 | ||
| Total | $ 588 | $2,334 | ||
*Includes all liabilities
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let's look, though, at a summary balance sheet and earnings statement for the entire group.
Balance Sheet 12/31/05 (in \$ millions)
| Assets | Liabilities and Equity Notes payable | $1,469 | |
| Cash and equivalents | $1,004 | ||
| Accounts and notes receivable | 3,287 | Other current liabilities | 5,371 |
| Inventory | 4,143 | Total current liabilities | 6,840 |
| Other current assets | 342 | ||
| Total current assets | 8,776 | ||
| Goodwill and other intangibles | 9,260 | Deferred taxes | 338 |
| Fixed assets | 7,148 | Term debt and other liabilities | 2,188 |
| Other assets | 1,021 | Equity | 16,839 |
| $26,205 | $26,205 |
Earnings Statement (in \$ millions)
| 2005 | 2004 | 2003 | |
| Revenues | $46,896 | $44,142 | $32,106 |
| Operating expenses (including depreciation of $699 in 2005, $676 in 2004 and $605 in 2003) | 44,190 | 41,604 | 29,885 |
| Interest expense (net) | 83 | 57 | 64 |
| Pre-tax earnings | 2,623 | 2,481 | 2,157 |
| Income taxes | 977 | 941 | 813 |
| Net income | $1,646 | $1,540 | $1,344 |
This eclectic collection, which sells products ranging from Dilly Bars to fractional interests in Boeing 737s, earned a very respectable 22.2% on average tangible net worth last year. It’s noteworthy also that these operations used only minor financial leverage in achieving that return. Clearly, we own some terrific businesses. We purchased many of them, however, at substantial premiums to net worth – a point reflected in the goodwill item shown on the balance sheet – and that fact reduces the earnings on our average carrying value to 10.1%.
Here are the pre-tax earnings for the larger categories or units.
| Pre-Tax Earnings(in $ millions) | ||
| 2005 | 2004 | |
| Building Products | $751 | $643 |
| Shaw Industries | 485 | 466 |
| Apparel & Footwear | 348 | 325 |
| Retailing of Jewelry, Home Furnishings and Candy | 257 | 215 |
| Flight Services | 120 | 191 |
| McLane | 217 | 228 |
| Other businesses | 445 | 413 |
| $2,623 | $2,481 | |
- In both our building-products companies and at Shaw, we continue to be hit by rising costs for raw materials and energy. Most of these operations are significant users of oil (or more specifically, petrochemicals) and natural gas. And prices for these commodities have soared.
We, likewise, have raised prices on many products, but there are often lags before increases become effective. Nevertheless, both our building-products operations and Shaw delivered respectable results in 2005, a fact attributable to their strong business franchises and able managements.
- In apparel, our largest unit, Fruit of the Loom, again increased earnings and market-share. You know, of course, of our leadership position in men's and boys' underwear, in which we account for about 48.7% of the sales recorded by mass-marketers (Wal-Mart, Target, etc.). That's up from 44.2% in 2002, when we acquired the company. Operating from a smaller base, we have made still greater gains in intimate apparel for women and girls that is sold by the mass-marketers, climbing from 13.7% of their sales in 2002 to 24.7% in 2005. A gain like that in a major category doesn't come easy. Thank John Holland, Fruit's extraordinary CEO, for making this happen.
- I told you last year that Ben Bridge (jewelry) and R. C. Willey (home furnishings) had same-store sales gains far above the average of their industries. You might think that blow-out figures in one year would make comparisons difficult in the following year. But Ed and Jon Bridge at their operation and Scott Hymas at R. C. Willey were more than up to this challenge. Ben Bridge had a 6.6% same-store gain in 2005, and R. C. Willey came in at 9.9%.
Our never-on-Sunday approach at R. C. Willey continues to overwhelm seven-day competitors as we roll out stores in new markets. The Boise store, about which I was such a skeptic a few years back, had a $21\%$ gain in 2005, coming off a $10\%$ gain in 2004. Our new Reno store, opened in November, broke out of the gate fast with sales that exceeded Boise's early pace, and we will begin business in Sacramento in June. If this store succeeds as I expect it to, Californians will see many more R. C. Willey stores in the years to come.
- In flight services, earnings improved at FlightSafety as corporate aviation continued its rebound. To support growth, we invest heavily in new simulators. Our most recent expansion, bringing us to 42 training centers, is a major facility at Farnborough, England that opened in September. When it is fully built out in 2007, we will have invested more than \$100 million in the building and its 15 simulators. Bruce Whitman, FlightSafety's able CEO, makes sure that no competitor comes close to offering the breadth and depth of services that we do.
Operating results at NetJets were a different story. I said last year that this business would earn money in 2005 – and I was dead wrong.
Our European operation, it should be noted, showed both excellent growth and a reduced loss. Customer contracts there increased by 37%. We are the only fractional-ownership operation of any size in Europe, and our now-pervasive presence there is a key factor in making NetJets the worldwide leader in this industry.
Despite a large increase in customers, however, our U.S. operation dipped far into the red. Its efficiency fell, and costs soared. We believe that our three largest competitors suffered similar problems, but each is owned by aircraft manufacturers that may think differently than we do about the necessity of making adequate profits. The combined value of the fleets managed by these three competitors, in any case, continues to be less valuable than the fleet that we operate.
Rich Santulli, one of the most dynamic managers I’ve ever met, will solve our revenue/expense problem. He won’t do it, however, in a manner that impairs the quality of the NetJets experience. Both he and I are committed to a level of service, security and safety that can’t be matched by others.
- Our retailing category includes See's Candies, a company we bought early in 1972 (a date making it our oldest non-insurance business). At that time, Charlie and I immediately decided to put Chuck Huggins, then 46, in charge. Though we were new at the game of selecting managers, Charlie and I hit a home run with this appointment. Chuck's love for the customer and the brand permeated the organization, which in his 34-year tenure produced a more-than-tenfold increase in profits. This gain was achieved in an industry growing at best slowly and perhaps not at all. (Volume figures in this industry are hard to pin down.)
At yearend, Chuck turned the reins at See's over to Brad Kinstler, who previously had served Berkshire well while running Cypress Insurance and Fechheimer's. It's unusual for us to move managers around, but Brad's record made him an obvious choice for the See's job. I hope Chuck and his wife, Donna, are at the annual meeting. If they are, shareholders can join Charlie and me in giving America's number one candy maker a richly-deserved round of applause.
* * * * * * * * * * * *
Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.
When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted. Take a look at the dilemmas of managers in the auto and airline industries today as they struggle with the huge problems handed them by their predecessors. Charlie is fond of quoting Ben Franklin’s “An ounce of prevention is worth a pound of cure.” But sometimes no amount of cure will overcome the mistakes of the past.
Our managers focus on moat-widening – and are brilliant at it. Quite simply, they are passionate about their businesses. Usually, they were running those long before we came along; our only function since has been to stay out of the way. If you see these heroes – and our four heroines as well – at the annual meeting, thank them for the job they do for you.
* * * * * * * * * * * *
The attitude of our managers vividly contrasts with that of the young man who married a tycoon's only child, a decidedly homely and dull lass. Relieved, the father called in his new son-in-law after the wedding and began to discuss the future:
“Son, you’re the boy I always wanted and never had. Here’s a stock certificate for 50% of the company. You’re my equal partner from now on.”
"Thanks, dad."
"Now, what would you like to run? How about sales?"
“I’m afraid I couldn’t sell water to a man crawling in the Sahara.”
“Well then, how about heading human relations?”
“I really don’t care for people.”
“No problem, we have lots of other spots in the business. What would you like to do?”
“Actually, nothing appeals to me. Why don’t you just buy me out?”
Investments
We show below our common stock investments. Those that had a market value of more than \$700 million at the end of 2005 are itemized.
| Shares | Company | Percentage of Company Owned | 12/31/05 | |
| Cost* (in $ millions) | Market | |||
| 151,610,700 | American Express Company | 12.2 | $1,287 | $ 7,802 |
| 30,322,137 | Ameriprise Financial, Inc | 12.1 | 183 | 1,243 |
| 43,854,200 | Anheuser-Busch Cos., Inc | 5.6 | 2,133 | 1,884 |
| 200,000,000 | The Coca-Cola Company | 8.4 | 1,299 | 8,062 |
| 6,708,760 | M&T Bank Corporation | 6.0 | 103 | 732 |
| 48,000,000 | Moody’s Corporation | 16.2 | 499 | 2,948 |
| 2,338,961,000 | PetroChina “H” shares (or equivalents) | 1.3 | 488 | 1,915 |
| 100,000,000 | The Procter & Gamble Company | 3.0 | 940 | 5,788 |
| 19,944,300 | Wal-Mart Stores, Inc. | 0.5 | 944 | 933 |
| 1,727,765 | The Washington Post Company | 18.0 | 11 | 1,322 |
| 95,092,200 | Wells Fargo & Company | 5.7 | 2,754 | 5,975 |
| 1,724,200 | White Mountains Insurance | 16.0 | 369 | 963 |
| Others | 4,937 | 7,154 | ||
| Total Common Stocks | $15,947 | $46,721 | ||
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-ups or write-downs that have been required.
A couple of last year's changes in our portfolio occurred because of corporate events: Gillette was merged into Procter & Gamble, and American Express spun off Ameriprise. In addition, we substantially increased our holdings in Wells Fargo, a company that Dick Kovacevich runs brilliantly, and established positions in Anheuser-Busch and Wal-Mart.
Expect no miracles from our equity portfolio. Though we own major interests in a number of strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they may double in value in ten years. The likelihood is that their per-share earnings, in aggregate, will grow 6-8% per year over the decade and that their stock prices will more or less match that growth. (Their managers, of course, think my expectations are too modest – and I hope they're right.)
* * * * * * * * * * * *
The P&G-Gillette merger, closing in the fourth quarter of 2005, required Berkshire to record a \$5.0 billion pre-tax capital gain. This bookkeeping entry, dictated by GAAP, is meaningless from an economic standpoint, and you should ignore it when you are evaluating Berkshire's 2005 earnings. We didn't intend to sell our Gillette shares before the merger; we don't intend to sell our P&G shares now; and we incurred no tax when the merger took place.
It's hard to overemphasize the importance of who is CEO of a company. Before Jim Kilts arrived at Gillette in 2001, the company was struggling, having particularly suffered from capital-allocation blunders. In the major example, Gillette's acquisition of Duracell cost Gillette shareholders billions of dollars, a loss never made visible by conventional accounting. Quite simply, what Gillette received in business value in this acquisition was not equivalent to what it gave up. (Amazingly, this most fundamental of yardsticks is almost always ignored by both managements and their investment bankers when acquisitions are under discussion.)
Upon taking office at Gillette, Jim quickly instilled fiscal discipline, tightened operations and energized marketing, moves that dramatically increased the intrinsic value of the company. Gillette's merger with P&G then expanded the potential of both companies. For his accomplishments, Jim was paid very well – but he earned every penny. (This is no academic evaluation: As a 9.7% owner of Gillette, Berkshire in effect paid that proportion of his compensation.) Indeed, it's difficult to overpay the truly extraordinary CEO of a giant enterprise. But this species is rare.
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won't change, moreover, because the deck is stacked against investors when it comes to the CEO's pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.
Take, for instance, ten year, fixed-price options (and who wouldn't?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these – let's say enough to give him an option on 1% of the company – his self-interest is clear: He should skip dividends entirely and instead use all of the company's earnings to repurchase stock.
Let's assume that under Fred's leadership Stagnant lives up to its name. In each of the ten years after the option grant, it earns \$1 billion on \$10 billion of net worth, which initially comes to \$10 per share on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 158% by the end of the option period. That's because repurchases would reduce the number of shares to 38.7 million by that time, and earnings per share would thereby increase to \$25.80. Simply by withholding earnings from owners, Fred gets very rich, making a cool \$158 million, despite the business itself improving not at all. Astonishingly, Fred could have made more than \$100 million if Stagnant's earnings had declined by 20% during the ten-year period.
Fred can also get a splendid result for himself by paying no dividends and deploying the earnings he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically – with Stagnant’s p/e ratio remaining unchanged at ten – Fred’s option will deliver him \$63 million. Meanwhile, his shareholders will wonder what happened to the “alignment of interests” that was supposed to occur when Fred was issued options.
A “normal” dividend policy, of course – one-third of earnings paid out, for example – produces less extreme results but still can provide lush rewards for managers who achieve nothing.
CEOs understand this math and know that every dime paid out in dividends reduces the value of all outstanding options. I’ve never, however, seen this manager-owner conflict referenced in proxy materials that request approval of a fixed-priced option plan. Though CEOs invariably preach internally that capital comes at a cost, they somehow forget to tell shareholders that fixed-price options give them capital that is free.
It doesn't have to be this way: It's child's play for a board to design options that give effect to the automatic build-up in value that occurs when earnings are retained. But – surprise, surprise – options of that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted for retained earnings seems foreign to compensation “experts,” who are nevertheless encyclopedic about every management-friendly plan that exists. (“Whose bread I eat, his song I sing.”)
Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.
Huge severance payments, lavish perks and outsized payments for ho-hum performance often occur because comp committees have become slaves to comparative data. The drill is simple: Three or so directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay statistics that perpetually ratchet upwards. Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish “goodies” are showered upon CEOs simply because of a corporate version of the argument we all used when children: “But, Mom, all the other kids have one.” When comp committees follow this “logic,” yesterday’s most egregious excess becomes today’s baseline.
Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood hero of mine. Hank's son, Steve, at one time was a player's agent. Representing an outfielder in negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he should ask for. Hank, a true pay-for-performance guy, got straight to the point, "What did he hit last year?" When Steve answered ".246," Hank's comeback was immediate: "Ask for a uniform."
(Let me pause for a brief confession: In criticizing comp committee behavior, I don't speak as a true insider. Though I have served as a director of twenty public companies, only one CEO has put me on his comp committee. Hmmm . . .)
* * * * * * * * * * * *
My views on America’s long-term problem in respect to trade imbalances, which I have laid out in previous reports, remain unchanged. My conviction, however, cost Berkshire \$955 million pre-tax in 2005. That amount is included in our earnings statement, a fact that illustrates the differing ways in which GAAP treats gains and losses. When we have a long-term position in stocks or bonds, year-to-year changes in value are reflected in our balance sheet but, as long as the asset is not sold, are rarely reflected in earnings. For example, our Coca-Cola holdings went from \$1 billion in value early on to \$13.4 billion at yearend 1998 and have since declined to \$8.1 billion – with none of these moves affecting our earnings statement. Long-term currency positions, however, are daily marked to market and therefore have an effect on earnings in every reporting period. From the date we first entered into currency contracts, we are \$2.0 billion in the black.
We reduced our direct position in currencies somewhat during 2005. We partially offset this change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally. Charlie and I prefer this method of acquiring non-dollar exposure. That's largely because of changes in interest rates: As U.S. rates have risen relative to those of the rest of the world, holding most foreign currencies now involves a significant negative "carry." The carry aspect of our direct currency position indeed cost us money in 2005 and is likely to do so again in 2006. In contrast, the ownership of foreign equities is likely, over time, to create a positive carry – perhaps a substantial one.
The underlying factors affecting the U.S. current account deficit continue to worsen, and no letup is in sight. Not only did our trade deficit – the largest and most familiar item in the current account – hit an all-time high in 2005, but we also can expect a second item – the balance of investment income – to soon turn negative. As foreigners increase their ownership of U.S. assets (or of claims against us) relative to U.S. investments abroad, these investors will begin earning more on their holdings than we do on ours. Finally, the third component of the current account, unilateral transfers, is always negative.
The U.S., it should be emphasized, is extraordinarily rich and will get richer. As a result, the huge imbalances in its current account may continue for a long time without their having noticeable deleterious effects on the U.S. economy or on markets. I doubt, however, that the situation will forever remain benign. Either Americans address the problem soon in a way we select, or at some point the problem will likely address us in an unpleasant way of its own.
How to Minimize Investment Returns
It's been an easy matter for Berkshire and other owners of American equities to prosper over the years. Between December 31, 1899 and December 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising answer is at the end of this section.) This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments.
The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company's losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves.
Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.
To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We'll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies. Today that amount is about \$700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.
But let's now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family's annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.
After a while, most of the family members realize that they are not doing so well at this new “beat-my-brother” game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.
The family's disappointment grows. Each of its members is now employing professionals. Yet overall, the group's finances have taken a turn for the worse. The solution? More help, of course.
It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don't suggest it to them.
The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”
The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self-confidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.
The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.
And that's where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).
A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
* * * * * * * * * * * *
Here's the answer to the question posed at the beginning of this section: To get very specific, the Dow increased from 65.73 to 11,497.12 in the $20^{\text{th}}$ century, and that amounts to a gain of $5.3\%$ compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate of gain in the $21^{\text{st}}$ century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 2,011,011.23. But I'm willing to settle for 2,000,000; six years into this century, the Dow has gained not at all.
Debt and Risk
As we consolidate MidAmerican, our new balance sheet may suggest that Berkshire has expanded its tolerance for borrowing. But that's not so. Except for token amounts, we shun debt, turning to it for only three purposes:
1) We occasionally use repos as a part of certain short-term investing strategies that incorporate ownership of U.S. government (or agency) securities. Purchases of this kind are highly opportunistic and involve only the most liquid of securities. A few years ago, we entered into several interesting transactions that have since been unwound or are running off. The offsetting debt has likewise been cut substantially and before long may be gone.
2) We borrow money against portfolios of interest-bearing receivables whose risk characteristics we understand. We did this in 2001 when we guaranteed \$5.6 billion of bank debt to take over, in partnership with Leucadia, a bankrupt Finova (which held a broad range of receivables). All of that debt has been repaid. More recently, we have borrowed to finance a widely-diversified, predictably-performing portfolio of manufactured-home receivables managed by Clayton. Alternatively, we could “securitize” – that is, sell – these receivables, but retain the servicing of them. If we followed this procedure, which is common in the industry, we would not show the debt that we do on our balance sheet, and we would also accelerate the earnings we report. In the end, however, we would earn less money. Were market variables to change so as to favor securitization (an unlikely event), we could sell part of our portfolio and eliminate the related debt. Until then, we prefer better profits to better cosmetics.
3) At MidAmerican, we have substantial debt, but it is that company's obligation only. Though it will appear on our consolidated balance sheet, Berkshire does not guarantee it.
Even so, this debt is unquestionably secure because it is serviced by MidAmerican's diversified stream of highly-stable utility earnings. If there were to be some bolt from the blue that hurt one of MidAmerican's utility properties, earnings from the others would still be more than ample to cover all debt requirements. Moreover, MidAmerican retains all of its earnings, an equity-building practice that is rare in the utility field.
From a risk standpoint, it is far safer to have earnings from ten diverse and uncorrelated utility operations that cover interest charges by, say, a 2:1 ratio than it is to have far greater coverage provided by a single utility. A catastrophic event can render a single utility insolvent – witness what Katrina did to the local electric utility in New Orleans – no matter how conservative its debt policy. A geographical disaster – say, an earthquake in a Western state – can’t have the same effect on MidAmerican. And even a worrier like Charlie can’t think of an event that would systemically decrease utility earnings in any major way. Because of MidAmerican’s ever-widening diversity of regulated earnings, it will always utilize major amounts of debt.
And that's about it. We are not interested in incurring any significant debt at Berkshire for acquisitions or operating purposes. Conventional business wisdom, of course, would argue that we are being too conservative and that there are added profits that could be safely earned if we injected moderate leverage into our balance sheet.
Maybe so. But many of Berkshire's hundreds of thousands of investors have a large portion of their net worth in our stock (among them, it should be emphasized, a large number of our board and key managers) and a disaster for the company would be a disaster for them. Moreover, there are people who have been permanently injured to whom we owe insurance payments that stretch out for fifty years or more. To these and other constituencies we have promised total security, whatever comes: financial panics, stock-exchange closures (an extended one occurred in 1914) or even domestic nuclear, chemical or biological attacks.
We are quite willing to accept huge risks. Indeed, more than any other insurer, we write high-limit policies that are tied to single catastrophic events. We also own a large investment portfolio whose market value could fall dramatically and quickly under certain conditions (as happened on October 19, 1987). Whatever occurs, though, Berkshire will have the net worth, the earnings streams and the liquidity to handle the problem with ease.
Any other approach is dangerous. Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero. That is not an equation whose effects I would like to experience personally, and I would like even less to be responsible for imposing its penalties upon others.
Management Succession
As owners, you are naturally concerned about whether I will insist on continuing as CEO after I begin to fade and, if so, how the board will handle that problem. You also want to know what happens if I should die tonight.
That second question is easy to answer. Most of our many businesses have strong market positions, significant momentum, and terrific managers. The special Berkshire culture is deeply ingrained throughout our subsidiaries, and these operations won't miss a beat when I die.
Moreover, we have three managers at Berkshire who are reasonably young and fully capable of being CEO. Any of the three would be much better at certain management aspects of my job than I. On the minus side, none has my crossover experience that allows me to be comfortable making decisions in either the business arena or in investments. That problem will be solved by having another person in the organization handle marketable securities. That’s an interesting job at Berkshire, and the new CEO will have no problem in hiring a talented individual to do it. Indeed, that’s what we have done at GEICO for 26 years, and our results have been terrific.
Berkshire's board has fully discussed each of the three CEO candidates and has unanimously agreed on the person who should succeed me if a replacement were needed today. The directors stay updated on this subject and could alter their view as circumstances change – new managerial stars may emerge and present ones will age. The important point is that the directors know now – and will always know in the future – exactly what they will do when the need arises.
The other question that must be addressed is whether the Board will be prepared to make a change if that need should arise not from my death but rather from my decay, particularly if this decay is accompanied by my delusionally thinking that I am reaching new peaks of managerial brilliance. That problem would not be unique to me. Charlie and I have faced this situation from time to time at Berkshire's subsidiaries. Humans age at greatly varying rates – but sooner or later their talents and vigor decline. Some managers remain effective well into their 80s – Charlie is a wonder at 82 – and others noticeably fade in their 60s. When their abilities ebb, so usually do their powers of self-assessment. Someone else often needs to blow the whistle.
When that time comes for me, our board will have to step up to the job. From a financial standpoint, its members are unusually motivated to do so. I know of no other board in the country in which the financial interests of directors are so completely aligned with those of shareholders. Few boards even come close. On a personal level, however, it is extraordinarily difficult for most people to tell someone, particularly a friend, that he or she is no longer capable.
If I become a candidate for that message, however, our board will be doing me a favor by delivering it. Every share of Berkshire that I own is destined to go to philanthropies, and I want society to reap the maximum good from these gifts and bequests. It would be a tragedy if the philanthropic potential of my holdings was diminished because my associates shirked their responsibility to (tenderly, I hope) show me the door. But don't worry about this. We have an outstanding group of directors, and they will always do what's right for shareholders.
And while we are on the subject, I feel terrific.
The Annual Meeting
Our meeting this year will be on Saturday, May 6. As always, the doors will open at the Qwest Center at 7 a.m., and the latest Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the question-and-answer period, which (with a break for lunch at the Qwest's stands) will last until 3:00. Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. This schedule worked well last year, because it let those who wanted to attend the formal session to do so, while freeing others to shop.
You certainly did your share in this respect last year. The 194,300 square foot hall adjoining the meeting area was filled with the products of Berkshire subsidiaries, and the 21,000 people who came to the meeting allowed every location to rack up sales records. Kelly Broz (neé Muchemore), the Flo Ziegfeld of Berkshire, orchestrates both this magnificent shopping extravaganza and the meeting itself. The exhibitors love her, and so do I. Kelly got married in October, and I gave her away. She asked me how I wanted to be listed in the wedding program. I replied “envious of the groom,” and that’s the way it went to press.
This year we will showcase two Clayton homes (featuring Acme brick, Shaw carpet, Johns Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). You will find that these homes, priced at \$79,000 and \$89,000, deliver excellent value. In fact, three shareholders came so firmly to that conclusion last year that they bought the \$119,000 model we then showcased. Flanking the Clayton homes on the exhibition floor will be RVs from Forest River.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a special shareholder discount (usually 8%). This special offer is permitted by 45 of the 50 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For at least 50% of you, I believe we can. And while you're at it, sign up for the new GEICO credit card. It's the one I now use.
On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets® available for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. Come to Omaha by bus; leave in your new plane.
The Bookworm boutique at the Qwest broke all records last year selling Berkshire-related books. An amazing 3,500 of these were Poor Charlie's Almanack, the collected wisdom of my partner. This means that a copy was sold every 9 seconds. And for good reason: You will never find a book with more useful ideas. Word-of-mouth recommendations have caused Charlie's first printing of 20,500 copies to sell out, and we will therefore have a revised and expanded edition on sale at our meeting. Among the other 22 titles and DVDs available last year at the Bookworm, 4,597 copies were sold for \$84,746. Our shareholders are a bookseller's dream.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations, we have again signed up American Express (800-799-6634) to give you special help. Carol Pedersen, who handles these matters, does a terrific job for us each year, and I thank her for it.
At Nebraska Furniture Mart, located on a 77-acre site on 72 $^{nd}$ Street between Dodge and Pacific, we will again be having “Berkshire Weekend” pricing. We initiated this special event at NFM nine years ago, and sales during the “Weekend” grew from \$5.3 million in 1997 to \$27.4 million in 2005 (up 9% from a year earlier). I get goose bumps just thinking about this volume.
To obtain the discount, you must make your purchases between Thursday, May 4 and Monday, May 8 inclusive, and also present your meeting credential. The period's special pricing will even apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting but that, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., we are having a special affair for shareholders only. I'll be there, eating barbeque, drinking Coke, and counting sales.
Borsheim's again will have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, May 5. The second, the main gala, will be from 9 a.m. to 4 p.m. on Sunday, May 7. On Saturday, we will be open until 6 p.m.
We will have huge crowds at Borsheim's throughout the weekend. For your convenience, therefore, shareholder prices will be available from Monday, May 1 through Saturday, May 13. During that period, just identify yourself as a shareholder through your meeting credentials or a brokerage statement.
Borsheim's operates on a gross margin that, even before the shareholders' discount, is fully twenty percentage points below that of its major rivals. Last year, our shareholder-period business increased $9\%$ from 2004, which came on top of a $73\%$ gain the year before. The store sold 5,000 Berkshire Monopoly games – and then ran out. We've learned: Plenty will be in stock this year.
In a tent outside of Borsheim's, Patrick Wolff, twice U.S. chess champion, will take on all comers in groups of six – blindfolded. Additionally, we will have Bob Hamman and Sharon Osberg, two of the world's top bridge experts, available to play with our shareholders on Sunday afternoon. They plan to keep their eyes open – but Bob never sorts his cards, even when playing for a national championship.
Gorat's – my favorite steakhouse – will again be open exclusively for Berkshire shareholders on Sunday, May 7, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat's on that day, you must have a reservation. To make one, call 402-551-3733 on April 1 (but not before).
In this school year, about 35 university classes will come to Omaha for sessions with me. I take almost all – in aggregate, perhaps 2,000 students – to lunch at Gorat's. And they love it. To learn why, come join us on Sunday.
We will again have a special reception from 4:00 to 5:30 on Saturday afternoon for shareholders who have come from outside of North America. Every year our meeting draws many people from around the globe, and Charlie and I want to be sure we personally greet those who have come so far. Last year we enjoyed meeting more than 400 of you from many dozens of countries. Any shareholder who comes from other than the U.S. or Canada will be given a special credential and instructions for attending this function.
* * * * * * * * * * * *
Charlie and I are extraordinarily lucky. We were born in America; had terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to other people who contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in which we are helped every day in countless ways by talented and cheerful associates. No wonder we tap-dance to work. But nothing is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 6 $^{th}$ at the Qwest for our annual Woodstock for Capitalists. We’ll see you there.
February 28, 2006
Warren E. Buffett
Chairman of the Board
伯克希尔公司业绩 vs 标普500
| 年份 | 年度百分比变化 | 相对业绩 (1)-(2) | ||
| 伯克希尔每股账面价值变化 (1) | 含股息标普500指数变化 (2) | |||
| 1965 | ...... | 23.8 | 10.0 | 13.8 |
| 1966 | ...... | 20.3 | (11.7) | 32.0 |
| 1967 | ...... | 11.0 | 30.9 | (19.9) |
| 1968 | ...... | 19.0 | 11.0 | 8.0 |
| 1969 | ...... | 16.2 | (8.4) | 24.6 |
| 1970 | ...... | 12.0 | 3.9 | 8.1 |
| 1971 | ...... | 16.4 | 14.6 | 1.8 |
| 1972 | ...... | 21.7 | 18.9 | 2.8 |
| 1973 | ...... | 4.7 | (14.8) | 19.5 |
| 1974 | ...... | 5.5 | (26.4) | 31.9 |
| 1975 | ...... | 21.9 | 37.2 | (15.3) |
| 1976 | ...... | 59.3 | 23.6 | 35.7 |
| 1977 | ...... | 31.9 | (7.4) | 39.3 |
| 1978 | ...... | 24.0 | 6.4 | 17.6 |
| 1979 | ...... | 35.7 | 18.2 | 17.5 |
| 1980 | ...... | 19.3 | 32.3 | (13.0) |
| 1981 | ...... | 31.4 | (5.0) | 36.4 |
| 1982 | ...... | 40.0 | 21.4 | 18.6 |
| 1983 | ...... | 32.3 | 22.4 | 9.9 |
| 1984 | ...... | 13.6 | 6.1 | 7.5 |
| 1985 | ...... | 48.2 | 31.6 | 16.6 |
| 1986 | ...... | 26.1 | 18.6 | 7.5 |
| 1987 | ...... | 19.5 | 5.1 | 14.4 |
| 1988 | ...... | 20.1 | 16.6 | 3.5 |
| 1989 | ...... | 44.4 | 31.7 | 12.7 |
| 1990 | ...... | 7.4 | (3.1) | 10.5 |
| 1991 | ...... | 39.6 | 30.5 | 9.1 |
| 1992 | ...... | 20.3 | 7.6 | 12.7 |
| 1993 | ...... | 14.3 | 10.1 | 4.2 |
| 1994 | ...... | 13.9 | 1.3 | 12.6 |
| 1995 | ...... | 43.1 | 37.6 | 5.5 |
| 1996 | ...... | 31.8 | 23.0 | 8.8 |
| 1997 | ...... | 34.1 | 33.4 | .7 |
| 1998 | ...... | 48.3 | 28.6 | 19.7 |
| 1999 | ...... | .5 | 21.0 | (20.5) |
| 2000 | ...... | 6.5 | (9.1) | 15.6 |
| 2001 | ...... | (6.2) | (11.9) | 5.7 |
| 2002 | ...... | 10.0 | (22.1) | 32.1 |
| 2003 | ...... | 21.0 | 28.7 | (7.7) |
| 2004 | ...... | 10.5 | 10.9 | (.4) |
| 2005 | ...... | 6.4 | 4.9 | 1.5 |
| 平均年化收益 — 1965-2005 | 21.5 | 10.3 | 11.2 | |
| 总体收益 — 1964-2005 | 305,134 | 5,583 | ||
注：数据按日历年计算，例外情况：1965和1966年截至9月30日；1967年为截至12月31日的15个月。
自1979年起，会计准则要求保险公司以市价而非原先的成本与市价孰低法来计价其持有的权益证券。下表中，伯克希尔1978年及之前的业绩已按新规重述。除此之外，所有其他数据均以原报告数字计算。
标普500的数据为税前，而伯克希尔的数据为税后。如果像伯克希尔这样的公司只是简单地持有标普500指数并计提相应税款，那么在指数上涨的年份，其业绩将落后于标普500；在指数下跌的年份，则会超越标普500。多年累积下来，税负将导致相当大的总体差距。
伯克希尔·哈撒韦公司
致伯克希尔·哈撒韦公司股东：
2005年，我们的账面净值增加了56亿美元，这使得A类股和B类股的每股账面价值均增长了6.4%。在过去41年里（即自现任管理层接管以来），每股账面价值从19美元增长至59,377美元，年复合增长率为21.5%。*
伯克希尔在2005年表现不俗。我们发起了五项收购（其中两项尚未完成），且大部分运营子公司经营良好。就连我们的保险业务整体也表现不错，尽管卡特里娜飓风给伯克希尔和整个行业都带来了创纪录的损失。我们估计卡特里娜飓风造成了25亿美元的损失——而她的"恶姐妹"丽塔和威尔玛则又让我们损失了9亿美元。
在饱受灾难的一年里，我们杰出的保险业绩要归功于GEICO及其卓越的CEO Tony Nicely。有一项数据格外突出：仅仅两年时间，GEICO的生产率就提高了32%。令人瞩目的是，保单数量增长了26%，而员工人数却减少了4%——未来还有更多提升空间。当我们以如此显著的方式降低单位成本时，就能为客户提供越来越大的价值。回报是：去年，GEICO赢得了市场份额，获得了可观的利润，并强化了其品牌。如果2006年你有了儿子或孙子，就给他取名Tony吧。
撰写这份报告的目标，是向你们提供估算伯克希尔内在价值所需的信息。我说"估算"，是因为内在价值的计算虽至关重要，但必然不够精确，甚至常常严重偏离。一个企业的未来越不确定，计算偏差就越可能离谱。（关于内在价值的解释，请见第77-78页。）在这方面，伯克希尔有一些优势：拥有广泛且相对稳定的盈利来源，同时具备极强的流动性和最低限度的债务。这些因素意味着，伯克希尔的内在价值比大多数公司都能被更精确地计算出来。
然而，如果说伯克希尔的财务特征有助于提高精确性，那么仅凭盈利来源之繁多，也使得计算内在价值的工作变得更加复杂。回想1965年，当时我们只拥有一家小型纺织企业，计算内在价值的任务轻而易举。如今，我们拥有68家截然不同的企业，其运营和财务特征差异巨大。这组互不关联的业务，加上我们庞大的投资组合，使得你无法仅仅通过查阅我们的合并财务报表就能形成对内在价值的明智估算。
我们尝试通过将业务分为四个逻辑组来缓解这个问题，本报告后面会逐一讨论。在这些讨论中，我们将提供每个组及其重要组成部分的关键数据。当然，伯克希尔的价值可能高于或低于这四个部分之和。结果取决于我们众多单元作为更大企业的一部分时表现更好还是更差，也取决于资本配置在控股公司的指挥下是改进了还是恶化了。换句话说，伯克希尔的所有权到底为这场聚会带来了什么？如果我们的股东直接持有我们68家业务中每一家的股份，他们会不会过得更好？这些都是重要的问题，但你必须自己回答。
不过，在审视我们各个业务之前，让我们先回顾两组数据，它们展示了我们从哪里来、现在在哪里。第一组是每股持有的投资金额（包括现金及现金等价物）。计算时，我们排除了金融业务持有的投资，因为这些投资基本上被借款抵消了：
| 年份 | 每股投资* |
| 1965 | $4 |
| 1975 | 159 |
| 1985 | 2,407 |
| 1995 | 21,817 |
| 2005 | $74,129 |
| 1965-2005年复合增长率 | 28.0% |
| 1995-2005年复合增长率 | 13.0% |
| *扣除少数股东权益 | |
除了这些有价证券（除极少数例外，均持有在我们的保险公司里），我们还有各种各样的非保险业务。下面，我们按每股展示这些业务的税前利润（不含商誉摊销）：
| 年份 | 每股利润* |
| 1965 | $ 4 |
| 1975 | 4 |
| 1985 | 52 |
| 1995 | 175 |
| 2005 | $2,441 |
| 1965-2005年复合增长率 | 17.2% |
| 1995-2005年复合增长率 | 30.2% |
*税前并扣除少数股东权益
讨论增长率时，你有理由怀疑为什么选了某个起始年份和终止年份。如果其中任何一年异常，增长率的计算都会被扭曲。尤其是，如果基础年份利润很差，可能会产生惊人却毫无意义的增长率。不过，在上表中，基础年份1965年异常良好：伯克希尔那年的利润超过了此前十年中除一年外的所有年份。
从这两张表可以看出，伯克希尔两个价值要素的相对增长率在过去十年发生了变化，这反映了我们越来越侧重业务收购。尽管如此，伯克希尔副董事长兼我的合伙人查理·芒格，和我都希望这两张表上的数字都能增加。在这个宏愿中，我们比喻性地希望避免一对老夫妇的命运——他们浪漫方面已经力不从心好一阵子了。当他们50周年结婚纪念日吃完晚餐时，妻子在轻柔音乐、美酒和烛光的刺激下，感受到久违的悸动，羞怯地提议丈夫上楼亲热。他痛苦地犹豫了一会儿，然后回答：“我两样只能干一样，不能同时干。”
收购
多年来，我们现有业务的总体经营利润应该会温和增长。但它们本身不会带来真正令人满意的收益。我们需要大规模收购才能实现这个目标。
在寻觅中，2005年令人振奋。我们达成了五项收购：其中两项已于去年完成，一项在年底后交割，另外两项预计很快完成。没有一笔交易涉及发行伯克希尔的股份。这一点至关重要，却常被忽视：当管理层得意洋洋地用股票收购另一家公司时，收购方的股东实际上正在同时出售他们所持有的全部资产的一部分权益。我自己也曾做过几次这类交易——总的来说，这些操作让你们亏了钱。
以下是去年的收购情况：
- 6月30日，我们收购了Medical Protective Company（简称“MedPro”），这是一家拥有106年历史的医疗事故保险公司，总部位于韦恩堡。医疗事故保险承保难度极大，对许多保险公司而言已是坟墓。不过，MedPro应当会表现良好。它将享有所有伯克希尔保险子公司共同的态度优势——承保纪律高于一切目标。此外，作为伯克希尔的一部分，MedPro的财务实力远超竞争对手，这一品质能确保医生们相信：那些需要多年才能结清的索赔，不会因为保险公司倒闭而重新找上他们。最后，该公司有一位聪明且精力充沛的CEO——Tim Kenesey，他本能地像伯克希尔的管理者那样思考。
- 我们的第二笔收购——Forest River，于8月31日完成交割。两个月前，也就是6月21日，我收到了一份两页的传真，逐条说明了Forest River为何符合本报告第25页列出的收购标准。我以前从未听说过这家公司——一家销售额达16亿美元的休闲车制造商——也不认识其所有者兼管理者Pete Liegl。但传真言之有理，我立即要求提供更多数据。第二天早上数据就到了，当天下午我就向Pete提出了报价。6月28日，我们握手成交。
Pete是一位杰出的企业家。几年前，他把当时远小于如今规模的企业卖给了一家杠杆收购运营商，后者立刻开始教他如何管理公司。没过多久，Pete就离开了，那家企业也很快陷入破产。随后Pete又把公司买了回来。你们可以放心，我不会告诉Pete如何管理他的业务。
Forest River拥有60家工厂、5400名员工，在休闲车业务中持续扩大市场份额，同时还拓展了船只等其他领域。Pete现年61岁——显然处于加速模式。请阅读随附的《RV Business》文章，你就会明白Pete和伯克希尔为何是天作之合。
- 2005年11月12日，《华尔街日报》刊登了一篇关于伯克希尔非同寻常的收购和管理实践的文章。文中Pete宣称：“卖掉我的公司比更新我的驾照还容易。”
在纽约，Cathy Baron Tamraz读到了这篇文章，深受触动。11月21日，她给我寄来一封信，开头写道：“作为Business Wire的总裁，我想向您介绍我的公司，因为我相信它符合伯克希尔·哈撒韦子公司的形象，正如近期《华尔街日报》文章所详述的那样。”
读完Cathy两页的信，我就觉得Business Wire和伯克希尔很契合。我尤其喜欢她的倒数第二段：“我们管理严格，不必要的开支一率严控。这里没有秘书或管理层级。然而，我们会投入大笔资金获取技术优势，推动业务向前发展。”
我立即给Cathy打了电话，不久之后，伯克希尔便与Business Wire的控股股东Lorry Lokey达成了协议。Lorry于1961年创办了这家公司（他刚任命Cathy为CEO）。我喜欢像Lorry这样的成功故事。如今78岁的他，建立了一家为150个国家、25,000家客户提供信息发布服务的公司。他的故事——就像许多选择伯克希尔作为毕生事业归宿的企业家一样——诠释了一个好创意、一个才华横溢的人与勤奋工作相结合所能产生的奇迹。
- 去年12月，我们同意收购Applied Underwriters（应用承保公司）81%的股权，这家公司为小企业提供薪资服务和工伤保险的组合方案。其大部分客户位于加利福尼亚州。
1998年，当时该公司只有12名员工，它收购了奥马哈一家有24名员工、提供类似服务的公司。Sid Ferenc和Steve Menzies——正是他们打造了Applied这项出色的业务——得出结论，认为奥马哈作为运营基地有许多优势（容我补充一句，这是个极具洞见的判断）。如今公司的479名员工中有400名在这里工作。
不到一年前，Applied与国民赔偿公司再保险部门的卓越管理者Ajit Jain签订了一份大额再保险合同。Ajit对Sid和Steve印象深刻，而他们也很欣赏伯克希尔的运作方式。于是我们决定联合。Sid和Steve保留了Applied 19%的股份，我们对此非常满意。他们12年前白手起家，有了伯克希尔的支持，看看他们能取得怎样的成就将是一件乐事。
- 去年春天，我们持股80.5%的子公司MidAmerican Energy（中美能源）同意收购PacifiCorp（太平洋公司），这是一家为西部六个州提供服务的电力公用事业公司。此类收购需要多项监管批准，但目前我们已获得这些批准，预计很快就能完成交易。届时伯克希尔将购入34亿美元的中美能源普通股，中美能源将再通过借款17亿美元来补足收购款项。你不可能指望在受监管的公用事业中赚取超高利润，但这个行业为所有者提供了以合理回报配置大额资金的机会——因此对伯克希尔来说是个不错的选择。几年前我曾说过，我们希望在该领域进行一些非常大规模的收购。注意我用了复数——我们还会继续寻找更多机会。
除了收购这些新业务，我们还在持续进行"补强型"收购。有些规模并不小：我们的地毯业务Shaw（萧氏）去年花费约5.5亿美元进行了两笔收购，进一步推进了垂直整合，未来有望提升利润率。XTRA（埃克斯特拉设备租赁）和Clayton Homes（克莱顿房屋）也完成了一些增值收购。
与许多企业买家不同，伯克希尔没有"退出策略"。我们收购就是为了长期持有。不过，我们确实有"进入策略"：在国内或国外寻找符合我们六项标准、且价格能产生合理回报的企业。如果你有合适的企业，给我打个电话。就像一个满怀期待的少女，我会守在电话旁。
保险
现在来谈谈我们的四个业务板块，先从我们的核心业务——保险说起。这里的关键是"浮存金"的数量及其长期成本。
对新读者，我解释一下。"浮存金"是指不属于我们、但暂时由我们持有的资金。我们大部分浮存金源于：(1) 保费是预先支付的，但我们提供的服务——保险保障——通常覆盖一年期；(2) 今天发生的损失事件并不总是立即导致赔付，因为有时损失需要多年才能报告（例如石棉损失）、协商并最终了结。1967年我们进入保险业时带来的2000万美元浮存金，如今通过内部增长和收购，已增至490亿美元。
浮存金妙不可言——前提是付出的代价不高。其成本由承销结果决定，即我们最终需要支付的费用和损失，与我们已收取的保费相比如何。当一家保险公司赚取承销利润时——正如伯克希尔（Berkshire）从事保险业务39年中有大约一半的年份那样——浮存金比免费的还要好。在这些年份里，我们实际上是拿着别人的钱还能获得报酬。然而，对于大多数保险公司来说，日子要艰难得多：总体而言，财产-意外险行业几乎总是处于承销亏损状态。当亏损巨大时，浮存金就变得昂贵，有时甚至是毁灭性的。
2004年，我们的浮存金成本低于零，我曾告诉你们，我们有希望在2005年获得零成本浮存金——只要不发生超级巨灾。但超级巨灾还是来了，作为这一险种的专家，伯克希尔遭受了34亿美元的飓风损失。然而，得益于我们在其他保险业务上的出色表现，尤其是政府雇员保险公司（GEICO），2005年的浮存金仍然是零成本的。
在GEICO，有效汽车保单数量增长了12.1%，使其在美国私人乘用车业务中的市场份额从约5.6%提升至约6.1%。汽车保险是一门大生意：每一个百分点相当于16亿美元的销售额。
尽管我们的品牌实力无法量化，但我相信它也在显著增强。1996年伯克希尔获得GEICO控股权时，其年度广告支出为3100万美元。去年，这一数字已增至5.02亿美元。我恨不得再多花一些。
我们的广告之所以有效，是因为我们有精彩的故事可讲：比起任何其他向所有来者提供保单的全国性保险公司，更多人可以通过向我们投保来省钱。（一些专业汽车保险公司能很好地服务于符合其特定客户群的申请人；此外，由于我们的全国性竞争对手使用与我们不同的评级体系，他们有时能在价格上打败我们。）去年，我们实现了有史以来最高的转化率——网络和电话询价最终成交的比例。这有力地证明，我们的价格相对于竞争对手而言比以往任何时候都更具吸引力。不妨亲自试试：访问GEICO.com或拨打800-847-7536。记得表明你是股东，因为这一身份通常能让你享受折扣。
去年我曾告诉你们，GEICO于2004年8月进入新泽西市场。该州的司机们非常喜欢我们。我们在那里的新保单持有人的留存率高于其他任何一个州，到2007年某个时候，GEICO很可能成为新泽西第三大汽车保险公司。在那里，和其他地方一样，我们的低成本带来了低价格，进而带来盈利业务的稳步增长。
这个简单的公式在55年前我第一次发现GEICO时就立刻打动了我。事实上，在我21岁时——当时该公司的市值只有700万美元——我写了一篇关于它的文章（文章重现于第24页）。正如你们所见，我将GEICO称为“我最喜欢的股票”。现在，我仍然这么称呼它。
我们在通用再保险公司（General Re）和国家赔偿公司（National Indemnity）拥有大型再保险业务。前者由Joe Brandon和Tad Montross管理，后者由Ajit Jain负责。考虑到袭击该行业的史无前例的飓风损失，这两家公司在2005年都表现良好。
大气、海洋或其他因果因素是否显著改变了飓风的频率或强度，目前尚无定论。近期的经历令人担忧。举例来说，我们知道在2004年之前的100年里，约有59个3级或以上的飓风袭击了美国东南部和墨西哥湾沿岸各州，其中只有3个是5级飓风。我们还知道，2004年就有三个3级飓风重创了这些地区，紧接着2005年又来了四个，其中卡特里娜（Katrina）是行业史上破坏力最强的飓风。此外，去年海岸附近有三个5级飓风，所幸在登陆前减弱了。
这一波更频繁、更强烈的风暴仅仅是异常现象吗？还是由气候变化、水温升高或其他我们尚未完全理解的变量造成的？这些因素是否会以某种方式发展，很快催生出比卡特里娜更严重的灾难？
乔（Joe）、阿吉特（Ajit）和我不知道这些至关重要问题的答案。我们只知道，自身的无知意味着我们必须遵循帕斯卡（Pascal）在其著名的“上帝存在赌注”中所指明的路径。你或许记得，他得出的结论是：既然他不知道答案，个人的得失比就促使他做出肯定的选择。
受此指引，我们得出了结论：现在承保超级巨灾保单，价格必须远高于去年水平——并且，只有当我们总的敞口不会因某些重要变量的变化而在近期引发更昂贵的风暴时，我们才会这么做。2004年之后，我们就有类似的感觉（但没那么强烈）——当价格没有变动时，我们缩减了承保量。如今，我们的谨慎态度进一步加深。不过，如果价格合适，我们仍有能力和意愿成为全球最大的超级巨灾保障承保商。
* * * * * * * * * * * *
我们的规模较小的保险公司——加上新纳入的MedPro——去年取得了真正出色的业绩。但你在下表中看到的数字并未完全体现它们的表现。这是因为收购后我们立即将MedPro的损失准备金增加了约1.25亿美元。
没有人能精确知道需要多少资金来支付我们承接的理赔。医疗事故险属于“长尾”险种，这意味着理赔往往需要很多年才能了结。此外，还有一些已经发生的损失，但我们在一段时间内甚至不会听说。不过，经过多年从业，我们学到了一件事——而且是吃了苦头才学到的：保险行业的意外远非对称。如果你遇到一次好消息，就会对应十次坏消息。但太多时候，保险公司面对逼近的损失问题时却持乐观态度。它们就像一场弹簧刀斗殴中的那个家伙，对手狠狠砍向他的喉咙后，他大叫：“你根本没碰到我。”对手回答：“等你试着摇摇头再说吧。”
排除我们为前期增加的准备金，MedPro实现了承保利润。我们的其他主要公司在合计1,270亿美元的保费规模下，取得了3.24亿美元的承保利润。这是一个非凡的成果，我们要感谢伯克希尔·哈撒韦家乡保险公司（Berkshire Hathaway Homestate Companies）的Rod Eldred、中央州担保公司（Central States Indemnity）的John Kizer、美国责任险公司（U. S. Liability）的Tom Nerney、堪萨斯银行家担保公司（Kansas Bankers Surety）的Don Towle和国家担保公司（National Indemnity）的Don Wurster。
以下是我们保险业务每个主要板块的承保和浮存金总体统计：
| （单位：百万美元） | ||||
| 承保利润（亏损） | 年末浮存金 | |||
| 保险业务 | 2005 | 2004 | 2005 | 2004 |
| 通用再保险...... | $( 334) | $ 3 | $22,920 | $23,120 |
| B-H再保险...... | (1,069) | 417 | 16,233 | 15,278 |
| 政府雇员保险公司...... | 1,221 | 970 | 6,692 | 5,960 |
| 其他主险...... | 235* | 161 | 3,442 | 1,736 |
| 合计...... | $ 53 | $1,551 | $49,287 | $46,094 |
* 包含自2005年6月30日起的MedPro。
受监管公用事业业务
我们持有中美洲能源控股（MidAmerican Energy Holdings）80.5%的权益（按摊薄计算），该公司拥有广泛的公用事业运营业务。其中最大的业务包括：(1) Yorkshire Electricity和Northern Electric，其370万电力用户使其成为英国第三大电力分销商；(2) 中美洲能源（MidAmerican Energy），主要为爱荷华州的70.6万电力用户提供服务；(3) Kern River和Northern Natural管道，输送了美国7.8%的天然气消费量。当我们的PacifiCorp收购完成后，将在西部六个州新增160万电力用户，其中俄勒冈州和犹他州为我们提供最多的业务。这笔交易将使中美洲能源的收入增加33亿美元，资产增加141亿美元。
《公共事业控股公司法》（PUHCA）于2005年8月8日被废除，这一里程碑事件使得伯克希尔于2006年2月9日将持有的中美洲能源优先股转换为有投票权的普通股。这一转换结束了PUHCA曾经强加给我们的复杂企业安排。现在我们拥有中美洲能源83.4%的普通股和投票权，这使得我们能够在财务会计和税务目的上合并该公司的收入。然而，我们真正的经济权益仍是前面提到的80.5%，因为存在一些未行权的期权，这些期权几乎肯定会在未来几年内行权，届时将稀释我们的所有权。
虽然我们的投票权大幅增加，但四方所有权的动态丝毫没有改变。我们将中美洲能源视为伯克希尔、Walter Scott以及两位优秀经理人Dave Sokol和Greg Abel之间的合伙企业。每一方拥有多少投票权并不重要；只有当我们一致认为某项重大举措是明智的，我们才会采取行动。与Dave、Greg和Walter共事五年，让我更加坚信最初的想法：伯克希尔不可能找到比他们更好的合作伙伴。
你会注意到，今年我们提供了两张资产负债表：一张是2005年12月31日按照美国通用会计准则计算的实际情况（未合并中美洲能源），另一张反映了我们后续的优先股转换情况。伯克希尔未来的所有财务报告都将包含中美洲能源的数据。
有些不可思议的是，中美洲能源还拥有美国第二大房地产经纪公司。而且这是一颗宝石。母公司的名称是HomeServices of America，但我们19200名经纪人通过18家本地品牌公司运营。在三次小型收购的帮助下，我们去年参与了640亿美元的交易，比2004年增长了6.5%。
目前，近几年来白热化的住宅房地产市场正在降温，这应该会给我们带来更多的收购机会。我们和公司CEO Ron Peltier都预期，十年后HomeServices的规模将大得多。
以下是中美洲能源运营的一些关键数据：
| 收益（单位：百万美元） | ||
| 2005年 | 2004年 | |
| 英国公用事业 | 3.08亿美元 | 3.26亿美元 |
| 爱荷华州公用事业 | 2.88亿美元 | 2.68亿美元 |
| 管道 | 3.09亿美元 | 2.88亿美元 |
| 房产服务 | 1.48亿美元 | 1.30亿美元 |
| 其他（净额） | 1.07亿美元 | 1.72亿美元 |
| 已终止锌项目的收益（亏损） | 800万美元 | (5.79亿美元) |
| 息税前利润 | 11.68亿美元 | 6.05亿美元 |
| 除伯克希尔外的利息 | (2.00亿美元) | (2.12亿美元) |
| 伯克希尔次级债务利息 | (1.57亿美元) | (1.70亿美元) |
| 所得税 | (2.48亿美元) | (5300万美元) |
| 净利润 | 5.63亿美元 | 1.70亿美元 |
| 伯克希尔应占利润* | 5.23亿美元 | 2.37亿美元 |
| 欠他人的债务 | 102.96亿美元 | 105.28亿美元 |
| 欠伯克希尔的债务 | 12.89亿美元 | 14.78亿美元 |
*包括伯克希尔赚取的利息（扣除相关所得税后），2005年为1.02亿美元，2004年为1.1亿美元。
金融和金融产品
我们金融板块的明星是Clayton Homes（克莱顿住宅），由凯文·克莱顿（Kevin Clayton）精妙运营。他的卓越业绩并非归功于顺风顺水：自伯克希尔2003年购入克莱顿以来，预制住宅行业一直令人失望。行业销售停滞在40年低位，最近卡特里娜飓风带来的需求提振几乎肯定会是昙花一现。近年来，许多业内参与者亏损连连，只有克莱顿赚到了可观的利润。
在这种残酷的环境下，克萊頓从主要银行手中大量收购了那些银行认为不赚钱且难以服务的预制住宅贷款。克萊頓的运营专长和伯克希尔的财务资源让这笔买卖成了我们的优等生意，而且我们在其中占据主导地位。目前我们管理着170亿美元的贷款，而收购时仅54亿美元。此外，克莱顿现在拥有其服务组合中96亿美元的资产，这一头寸几乎完全是伯克希尔介入后建立起来的。
为了给这个组合融资，克莱顿从伯克希尔借钱，伯克希尔则用同样的金额公开借款。伯克希尔向其借款成本加收一个百分点，作为信用使用的费用。2005年，克莱顿为此安排支付的费用为8300万美元。这笔金额包含在对面页表格的“其他”收益中，而克莱顿4.16亿美元的利润是在扣除这笔付款后计算的。
在制造端，克莱顿同样动作频频。在其最初20家工厂的基础上，它先是在2004年通过破产收购奥克伍德（Oakwood）——就在几年前，这家公司还是业内最大的企业之一——又增加了12家工厂。随后，在2005年克莱顿收购了卡尔斯滕（Karsten），后者拥有4家工厂，大大增强了克莱顿在西海岸的地位。
很久以前，马克·吐温说过：“一个试图拽着猫尾巴把猫带回家的人，会得到一个用其他方式学不到的教训。”如果吐温还在世，他也许会尝试收拾衍生品业务。过不了几天，他就会选择去拽猫了。
我们在持续退出通用再保险（Gen Re）衍生品业务的过程中，去年税前亏损1.04亿美元。自开始这一努力以来的累计亏损总额为4.04亿美元。
最初我们有23,218份未平仓合约。到2005年初，减少到2,890份。你可能会以为到这个点亏损就该止住了，但鲜血一直在流。去年我们将库存减至741份合约，却付出了上面提到的1.04亿美元代价。
记住，1990年设立这个部门（衍生品交易业务）的理由，是通用再保险希望满足保险客户的需求。然而，我们2005年清算的合约中，有一份竟然长达100年！很难想象这样一份合约能满足什么“需求”——除非，是满足一位看重奖金的交易员希望账上挂着长期合约的“需求”。长期合约，或者那些涉及多个变量的合约，是最难按市价结算的（衍生品会计的标准做法），也为交易员估值时发挥“想象力”提供了最多的空间。难怪交易员们热衷于推销它们。
一项业务中，巨额的报酬来自臆想出来的数字，这显然充满了危险。当两位交易员执行一笔涉及多个（有时甚至很古怪的）变量、且结算日期遥远的交易时，他们各自的公司随后必须在每次计算收益时给这些合约估值。同一份合约，A公司可能估一个价，B公司又估另一个价。你完全可以打赌，估值的差异——我个人就知道几个差异巨大的例子——往往倾向于让各家公司报出更高的收益。这个世界真奇怪：双方做了一笔纸面交易，却都能立刻宣称它赚钱了。
我每年都要花时间讲讲我们在衍生品上的经历，有两个原因。第一个是个人原因，而且不愉快。事实是，我没有立刻动手关停通用再保险的交易业务，这让我为大家损失了很多钱。查理和我在收购通用再保险的时候就清楚这是个问题，并告诉管理层我们想退出这个业务。确保这件事得到执行是我的责任。然而，我没有直面问题，反而浪费了好几年想把这个业务卖掉。那是个注定徒劳的努力，因为没有任何现实的方案能把我们从这堆将要存在几十年的负债迷宫里解救出来。我们的义务尤其令人担忧，因为它们可能爆炸的潜在规模根本无法衡量。而且，一旦出了大麻烦，我们知道它很可能与金融市场上其他地方的问题同时爆发。
所以，我试图无损退出的努力失败了，与此同时，更多交易被记在了账上。要怪就怪我优柔寡断吧。（查理管这叫“嘬手指头”）。当问题出现时——无论是人事问题还是业务问题——行动的时间就是现在。
我经常描述我们在这一领域遇到的麻烦，第二个原因是希望我们的经历能对管理者、审计师和监管机构有所启发。从某种意义上说，我们就是这条业务煤矿井里的金丝雀，应该在自己咽气前唱一首警示之歌。全球未结清衍生品合约的数量和金额还在继续膨胀，如今已是1998年（上一次金融大混乱爆发的那一年）的很多倍。
我们的经历尤其值得警醒，因为就体面退出而言，我们已经算是条件优于平均水平的候选者了。通用再保险在衍生品领域只是个相对较小的参与者。它有幸在一个温和的市场里清算那些理论上具有流动性的头寸，而且始终没有面临财务或其他方面的压力——那些压力本可能迫使其以低效的方式进行清算。我们过去的会计处理是常规的，实际上还被认为比较保守。此外，我们也不知道涉及此事的任何人有过不当行为。
但对未来的其他人来说，情况可能完全不同。请想象一下：一家或多家公司（麻烦往往会蔓延）持有比我们多很多倍的头寸，试图在混乱的市场中、在极端且备受瞩目的压力下进行清算。这个场景现在就应该得到密切关注，而不是事后才去关注。考虑——并改进——新奥尔良防洪堤可靠性的时机，应该是在卡特里娜飓风之前。
当我们最终关闭Gen Re证券时，我对它离开的感受，就像一首乡村歌里唱的：“我老婆跟我最好的朋友跑了，我还真想念那个朋友。”
以下是我们在金融及金融产品业务上的各项业绩：
| （单位：百万美元） | ||||
|---|---|---|---|---|
| 税前利润 | 有息负债 | |||
| 2005 | 2004 | 2005 | 2004 | |
| 交易业务——正常利润 | $ 200 | $ 264 | $1,061 | $5,751 |
| Gen Re证券（亏损） | (104) | (44) | 2,617* | 5,437* |
| 寿险与年金业务 | 11 | (57) | 2,461 | 2,467 |
| Value Capital（亏损） | (33) | 30 | N/A | N/A |
| 租赁业务 | 173 | 92 | 370 | 391 |
| 活动房屋融资（Clayton） | 416 | 192 | 9,299 | 3,636 |
| 其他 | 159 | 107 | N/A | N/A |
| 资本收益前利润 | 822 | 584 | ||
| 交易业务——资本利得（亏损） | (234) | 1,750 | ||
| 合计 | $ 588 | $2,334 |
*包括所有负债
制造、服务与零售业务
我们在伯克希尔的这部分业务五花八门，覆盖了方方面面。不过，我们还是来看看整个集团的资产负债表和利润表摘要。
资产负债表 2005年12月31日 （单位：百万美元）
| 资产 | 负债与权益 | |||
|---|---|---|---|---|
| 现金及现金等价物 | $1,004 | 应付票据 | $1,469 | |
| 应收账项及应收票据 | 3,287 | 其他流动负债 | 5,371 | |
| 存货 | 4,143 | 流动负债合计 | 6,840 | |
| 其他流动资产 | 342 | |||
| 流动资产合计 | 8,776 | |||
| 商誉及其他无形资产 | 9,260 | 递延税项 | 338 | |
| 固定资产 | 7,148 | 长期债务及其他负债 | 2,188 | |
| 其他资产 | 1,021 | 权益 | 16,839 | |
| 总计 | $26,205 | 总计 | $26,205 |
利润表 （单位：百万美元）
| 2005 | 2004 | 2003 | |
|---|---|---|---|
| 营业收入 | $46,896 | $44,142 | $32,106 |
| 营业费用（含折旧：2005年$699、2004年$676、2003年$605） | 44,190 | 41,604 | 29,885 |
| 利息费用（净额） | 83 | 57 | 64 |
| 税前利润 | 2,623 | 2,481 | 2,157 |
| 所得税 | 977 | 941 | 813 |
| 净利润 | $1,646 | $1,540 | $1,344 |
这个五花八门的组合——销售的产品从Dilly Bars冰淇淋到波音737的部分权益——去年在平均有形净资产上收获了相当可观的22.2%回报率。同样值得注意的是，这些业务实现这一回报时仅使用了很小的财务杠杆。显然，我们拥有一些出色的企业。不过，我们购买其中许多公司时支付了相对于净资产的大幅溢价——这一点反映在资产负债表上的商誉科目中——这一事实使得我们的平均账面价值收益率降至10.1%。
以下是主要业务类别或单位的税前利润：
| 税前利润（单位：百万美元） | ||
| 2005年 | 2004年 | |
| 建材产品 | $751 | $643 |
| Shaw Industries | 485 | 466 |
| 服装与鞋类 | 348 | 325 |
| 珠宝、家居饰品和糖果零售 | 257 | 215 |
| 航空服务 | 120 | 191 |
| McLane | 217 | 228 |
| 其他业务 | 445 | 413 |
| $2,623 | $2,481 | |
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我们的建材产品公司和Shaw Industries都持续受到原材料和能源成本上涨的冲击。这些业务大多大量消耗石油（更确切地说是石化产品）和天然气，而这些大宗商品的价格已经飙升。
同样，我们提高了许多产品的售价，但提价往往需要一段时间才能生效。不过，尽管面临这些挑战，我们的建材产品业务和Shaw Industries在2005年仍然交出了不错的成绩单，这要归功于它们强大的业务特许经营权和能干的管理层。 -
在服装领域，我们最大的业务单元——Fruit of the Loom再次实现了利润和市场份额的增长。各位当然知道我们在男士和男童内衣领域的领先地位，目前我们在大众零售商（沃尔玛、Target等）的销售额中约占48.7%，高于2002年收购该公司时的44.2%。在基数更小的基础上，我们在面向女性及女童、通过大众零售商销售的贴身内衣领域取得了更大的进展，市场份额从2002年的13.7%攀升至2005年的24.7%。在一个主要品类中取得这样的增长绝非易事。感谢Fruit的杰出CEO John Holland，是他让这一切成为现实。
-
去年我告诉过各位，Ben Bridge（珠宝）和R. C. Willey（家居饰品）的同店销售额增长远高于行业平均水平。你们可能会想，一年的大幅增长会让随后一年的比较变得困难。但Ben Bridge的Ed和Jon Bridge以及R. C. Willey的Scott Hymas出色地应对了这一挑战。Ben Bridge在2005年实现了6.6%的同店增长，R. C. Willey则达到了9.9%。
R. C. Willey坚持周日不营业的做法，在我们拓展新市场开设门店时，依然让那些每周七天营业的竞争对手难以匹敌。几年前我还对博伊西门店心存疑虑，但它在2004年增长10%的基础上，2005年又增长了21%。我们于11月在雷诺开设的新店开局迅猛，销售额超过了博伊西早期的水平，而我们将在六月开始在萨克拉门托开展业务。如果这家店像我预期的那样成功，加州人未来几年将会看到更多R. C. Willey的门店。
- 在航空服务领域，随着公务航空的持续复苏，FlightSafety的利润有所改善。为了支持增长，我们在新模拟器上投入了大量资金。我们最近的一次扩张是在英格兰范堡罗开设了一家大型设施，于九月启用，使得我们的培训中心增至42个。到2007年该设施全面投入运营时，我们在其建筑和15台模拟器上的总投资将超过1亿美元。FlightSafety能干的CEO Bruce Whitman确保没有任何竞争对手能在服务广度和深度上接近我们。
NetJets的经营业绩则是另一番景象。去年我说这家公司2005年能实现盈利——但我彻底错了。
需要指出的是，我们在欧洲的业务既表现出了出色的增长，也减少了亏损。那里的客户合同增加了37%。我们是欧洲唯一一家具有一定规模的飞机分时所有权运营商（fractional-ownership operation），我们在那里现已广泛的存在，是让NetJets成为该行业全球领导者的关键因素。
然而，尽管客户大幅增长，我们的美国业务却陷入严重亏损。效率下滑，成本飙升。我们认为，三大主要竞争对手也面临类似问题，但它们都由飞机制造商控股，这些制造商对获取足够利润的必要性或许与我们有不同看法。无论如何，这三家竞争对手所管理机队的合计价值，仍不及我们运营的机队。
Rich Santulli是我见过最有干劲的经理人之一，他会解决我们的收支问题。但他不会以牺牲NetJets（奈特捷）体验为代价。他和我都致力于提供无人能及的服务、保障和安全水平。
- 我们的零售业务包括See's Candies（喜诗糖果），这家公司我们在1972年初收购（因此它成为我们历史最悠久的非保险业务）。当时，Charlie和我立即决定让时年46岁的Chuck Huggins负责。虽然我们在挑选经理人方面还是新手，但这次任命，Charlie和我可谓打出了本垒打。Chuck对客户和品牌的热爱渗透了整个组织，在他34年的任期内，利润增长了十倍以上。这一增长是在一个顶多缓慢增长、甚至可能完全没有增长的行业中实现的。（该行业的销量数据很难精确统计。）
年底，Chuck将See's的经营缰绳交给了Brad Kinstler，Brad此前在管理Cypress Insurance（赛普拉斯保险）和Fechheimer's（费希默公司）时表现出色，为伯克希尔（Berkshire）立下功劳。我们很少调动经理人，但Brad的履历使他成为接手See's的不二人选。我希望Chuck和夫人Donna能来参加股东大会。如果他们来了，股东们可以和我跟Charlie一起，为美国第一糖果制造商送上当之无愧的热烈掌声。
每一天，我们每一项业务的竞争地位都在以无数种方式变弱或变强。如果我们让客户满意，消除不必要的成本，改进产品和服务，我们就会增强实力。但如果我们对客户漠不关心，或者容忍臃肿，我们的业务就会凋零。每天来看，我们行动的效果微乎其微；但日积月累，其后果却极其巨大。
当我们长期竞争地位因这些几乎察觉不到的行动而改善时，我们将此现象描述为“加宽护城河”。如果我们想在十年或二十年后拥有理想中的企业，这是必不可少的。当然，我们总是希望短期内赚更多钱。但当短期与长期发生冲突时，加宽护城河必须优先考虑。如果管理层为了达到短期盈利目标而做出糟糕决策，从而在成本、客户满意度或品牌实力方面陷入被动，那么任何后续的聪明才智都无法弥补已造成的损害。看看今天汽车和航空公司经理人们的困境吧，他们正在与前任留下的巨大问题苦苦挣扎。Charlie喜欢引用本·富兰克林的话：“一分预防胜过十分治疗。”但有时，再多的治疗也无法弥补过去的错误。
我们的经理人专注于加宽护城河——而且非常擅长。简言之，他们对各自的事业充满激情。通常，在我们到来之前，他们就已经在经营这些业务很久了；我们自那以后的唯一作用就是不碍事。如果在股东大会上见到这些英雄——还有我们的四位女英雄——请感谢他们为你所做的工作。
我们经理人的态度，与一个年轻小伙子的态度形成了鲜明对比。那小伙子娶了一位大亨的独生女，一个其貌不扬又乏味的姑娘。如释重负的父亲在婚礼后叫来新女婿，开始讨论未来：
“儿子，你就是我一直想要却从没有的那个男孩。这是公司50%的股票凭证。从今往后，你是我平等的合伙人。”
“谢谢，爸。”
“现在，你想负责哪块？销售怎么样？”
“恐怕就算有人在撒哈拉沙漠里爬着快渴死，我也卖不出一瓶水给他。”
“那好吧，负责人力资源呢？”
“我真的不喜欢和人打交道。”
“没问题，公司里还有不少其他位置。你想做什么？”
“说实话，没一样让我感兴趣。你干脆把我买断了吧。”
投资
下面列示我们持有的普通股投资。其中截至2005年末市值超过7亿美元的投资已单独列出。
| 持股数 | 公司名称 | 持股比例（%） | 成本*（百万美元） | 市值（百万美元） |
|---|---|---|---|---|
| 151,610,700 | American Express Company | 12.2 | $1,287 | $7,802 |
| 30,322,137 | Ameriprise Financial, Inc | 12.1 | 183 | 1,243 |
| 43,854,200 | Anheuser-Busch Cos., Inc | 5.6 | 2,133 | 1,884 |
| 200,000,000 | The Coca-Cola Company | 8.4 | 1,299 | 8,062 |
| 6,708,760 | M&T Bank Corporation | 6.0 | 103 | 732 |
| 48,000,000 | Moody's Corporation | 16.2 | 499 | 2,948 |
| 2,338,961,000 | PetroChina “H” shares (or equivalents) | 1.3 | 488 | 1,915 |
| 100,000,000 | The Procter & Gamble Company | 3.0 | 940 | 5,788 |
| 19,944,300 | Wal-Mart Stores, Inc. | 0.5 | 944 | 933 |
| 1,727,765 | The Washington Post Company | 18.0 | 11 | 1,322 |
| 95,092,200 | Wells Fargo & Company | 5.7 | 2,754 | 5,975 |
| 1,724,200 | White Mountains Insurance | 16.0 | 369 | 963 |
| 其他 | 4,937 | 7,154 | ||
| 普通股合计 | $15,947 | $46,721 |
*此为我们的实际买入价，也是计税基础；美国通用会计准则（GAAP）列示的“成本”因部分情况下发生增记或减记而有所不同。
去年我们的投资组合中有几个变化是因公司事件所致：吉列（Gillette）并入宝洁（Procter & Gamble），美国运通（American Express）分拆出阿默普莱斯（Ameriprise）。此外，我们大幅增持了富国银行（Wells Fargo）——这家公司在Dick Kovacevich的出色经营下——并新建了安海斯-布希（Anheuser-Busch）和沃尔玛（Wal-Mart）的头寸。
不要指望我们的股票组合能带来奇迹。虽然我们持有若干家实力雄厚、利润丰厚的企业的重大权益，但它们目前的售价远谈不上便宜。整体而言，它们十年后市值或许能翻倍。更可能的情况是，它们的每股收益合计在未来十年每年增长6-8%，股价也会大致匹配这个增速。（当然，这些公司的管理层觉得我的预期过于保守——希望他们是对的。）
宝洁-吉列合并案于2005年第四季度完成，伯克希尔因此需要确认50亿美元的税前资本利得。这一由美国通用会计准则（GAAP）规定的会计分录，从经济角度看毫无意义，你在评估伯克希尔2005年业绩时应忽略它。我们本无意在合并前卖出吉列股票，现在也无意卖出宝洁股票；而且合并发生时我们没有产生任何税负。
再怎么强调公司CEO人选的重要性都不为过。在吉姆·基尔茨（Jim Kilts）于2001年接管吉列之前，公司处境艰难，尤其饱受资本配置失误之苦。一个典型例子：吉列收购金霸王，让吉列股东损失了数十亿美元，传统会计从未揭示这一损失。很简单，吉列在此次收购中获得的商业价值，与其付出的代价并不对等。（令人惊讶的是，在讨论收购时，管理方及其投资银行几乎总是忽视这一最基本的衡量标准。）
吉姆上任后迅速灌输财务纪律、收紧运营并激活营销，这些举措大幅提升了公司的内在价值。随后吉列与宝洁的合并，进一步发掘了两家公司的潜力。鉴于他的成就，吉姆获得了丰厚的薪酬——但他每一分钱都当之无愧。（这绝非学术评价：作为吉列9.7%的股东，伯克希尔实际上支付了他薪酬中相应比例的部分。）确实，一家大型企业真正卓越的CEO，很难被过高支付。但这种物种极为罕见。
在美国，高管薪酬与业绩荒谬地脱节已成为常态。而且，这种情况不会改变，因为在CEO薪酬问题上，牌局对投资者不利。结果是，一个平庸甚至更差的CEO——在他亲手挑选的人力资源副总裁以及来自永远好说话的"棘轮、棘轮与宾果"公司的顾问的协助下——常常从设计糟糕的薪酬安排中获取大笔金钱。
以十年期固定价格期权为例（谁不想要呢？）。如果停滞公司（Stagnant, Inc.）的CEO弗雷德·弗特尔（Fred Futile）获得了一大捆这样的期权——比方说足以让他有权购买公司1%的股份——他的自身利益就很清楚：他应该完全跳过股息，而是将公司所有利润用于回购股票。
假设在弗雷德的领导下，停滞公司名副其实。在期权授予后的十年里，每年在100亿美元净值上赚取10亿美元，最初对当时流通的1亿股而言相当于每股10美元。弗雷德放弃股息，定期将所有利润用于回购股票。如果该股票始终以每股收益的10倍出售，那么到期权期末，股价将上涨158%。这是因为到那时回购将使股票数量减少至3870万股，每股收益因此增至25.80美元。仅仅通过将利润扣留在股东之外，弗雷德就变得非常富有，净赚1.58亿美元，尽管企业本身毫无改善。令人惊讶的是，如果停滞公司的利润在十年间下降了20%，弗雷德本来可以赚得超过1亿美元。
弗雷德也可以通过不派发股息，并将他扣留的股东利润投入各种令人失望的项目和收购中来为自己谋得丰厚的回报。即使这些举措仅提供微薄的5%回报，弗雷德仍将大赚一笔。具体而言——在停滞公司市盈率保持10倍不变的情况下——弗雷德的期权将为他带来6300万美元。与此同时，他的股东们会纳闷，当初授予弗雷德期权时本该出现的"利益一致性"发生了什么变化。
当然，一个"正常"的股息政策——例如派发三分之一的利润——产生的结果不那么极端，但仍然可以为毫无建树的管理者提供丰厚的回报。
CEO们都懂这个算术，知道每支付一毛钱股息，就会压低所有已发行期权的价值。然而，我从未在请求批准固定价格期权计划的股东委托书中看到这种管理者与所有者之间的冲突被提及。虽然CEO们总在公司内部宣扬资本是有成本的，但他们不知何故忘了告诉股东：固定价格期权给他们的其实是免费资本。
事情本不必如此：董事会要设计出能反映留存收益自动增值效应的期权，简直是小儿科。但——瞧瞧，多意外——这种期权几乎从未被发行过。确实，对于薪酬“专家”而言，那种行权价随留存收益调整的期权想法，似乎闻所未闻；可他们对所有讨好管理层的方案却了如指掌。（“吃谁的饭，唱谁的歌。”）
对CEO来说，被解雇可能带来格外丰厚的回报。实际上，他在清理办公桌的那一天里“赚到”的钱，可能比一个美国工人一辈子打扫厕所赚的还多。忘掉那句老话“成功无过于成功”吧：如今在管理层套房里，太过普遍的规则是“失败无过于失败”。
巨额遣散费、奢侈福利以及为平庸业绩支付的天价报酬之所以频频发生，是因为薪酬委员会沦为了比较数据的奴隶。套路很简单：三位左右董事——并非随机选定——在董事会会议前花几小时被灌输那些不断向上抬升的薪酬统计数据。此外，委员会还会被告知其他高管正在享受的新福利。就这样，离谱的“好东西”如雨点般洒向CEO们，仅仅因为我们小时候都用过的那个理由：“可是，妈妈，别的孩子都有啊。”当薪酬委员会遵循这种“逻辑”时，昨天最过分的超额就成了今天的基准。
薪酬委员会应该采取Hank Greenberg的态度——这位底特律强打手是我儿时的英雄。Hank的儿子Steve一度是球员经纪人。在代表一名外野手与一家大联盟俱乐部谈判时，Steve向他父亲请教应该要多少签字费。Hank是个真正按绩效付酬的人，单刀直入地问：“他去年打击率多少？”Steve回答“.246”时，Hank立刻反击：“问他要套球衣。”
（请允许我稍作坦白：批评薪酬委员会行为时，我并非以局内人身份发言。虽然我在20家上市公司担任过董事，但只有一位CEO把我放进了他的薪酬委员会。嗯……）
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关于美国长期贸易失衡问题，我在之前的报告中已阐述过观点，至今不变。然而，我的这份信念在2005年让伯克希尔付出了9.55亿美元的税前代价。该金额已计入我们的利润表——这一事实恰好说明了美国通用会计准则在收益和损失处理上的差异。当我们持有股票或债券的长期头寸时，年度间的价值变动反映在资产负债表上，但只要资产未被出售，极少影响利润表。例如，我们持有的可口可乐股票价值从早期的10亿美元升至1998年底的134亿美元，后又跌至81亿美元——这些变动均未影响我们的利润表。但长期外汇头寸则每日按市价调整，因此在每个报告期都会影响利润。从我们首次签订外汇合约起，累计盈利为20亿美元。
2005年期间，我们小幅减持了直接持有的外币头寸。但作为对冲，我们增持了以多种外币计价、且利润主要来自国际业务的股票。查理和我更偏爱这种获取非美元敞口的方式，主要原因是利率变动：随着美国利率相对全球其他地区上升，持有大多数外币目前会带来显著的负"持有成本"。我们直接持有的外币头寸在2005年确实因此亏损，2006年可能还会重蹈覆辙。而长期来看，持有外国股票则可能带来正持有成本——甚至相当可观。
影响美国经常账户赤字的基本面因素持续恶化，且未见缓和迹象。2005年不仅我们的贸易逆差（经常账户中最大也最熟知的科目）创下历史新高，另一个科目——投资收入余额——预计也很快会转负。随着外国人持有的美国资产（或对美国债权的索取权）相对于美国海外投资的比例上升，这些投资者从所持资产中获得的收益将逐渐超过我们从海外投资中获得的收益。最后，经常账户的第三个组成部分——单边转移支付——始终为负。
需要强调的是，美国极其富有，且会越来越富。因此，其经常账户的巨大失衡可能持续很长时间，而不会对美国经济或市场造成显著的负面影响。但我怀疑这种良性局面能否永久持续。要么美国人尽快以我们选择的方式解决这个问题，要么在某个时点，问题可能会以它自己的不愉快方式找上我们。
如何最小化投资回报
多年来，伯克希尔和其他美国股票持有者要获得丰厚回报轻而易举。举一个真正的长期例子：从1899年12月31日到1999年12月31日，道指从66点涨至11,497点（猜猜需要多高的年增长率才能实现这一结果？令人惊讶的答案在本节末尾）。这一巨大涨幅源于一个简单原因：上个世纪美国企业表现非凡，投资者乘着它们繁荣的浪潮前进。企业如今依然表现出色。但现在，股东们通过一系列自残行为，正在大幅削减他们将从投资中获得的回报。
解释这一现象的起点是一个基本真理：除了一些无关紧要的例外（比如破产时部分损失由债权人承担），从此刻到世界末日，所有所有者总共能赚到的钱，就是他们的企业在总体上赚到的钱。没错，通过聪明或幸运的买卖，投资者A可能以投资者B为代价获得更多份额。而且，当股票飙升时，所有投资者都觉得自己更富了。但一个所有者只能通过让别人接替他才能退出。如果一个投资者高价卖出，另一个就必须高价买入。对于所有所有者整体而言，没有魔法——没有从外太空降落的金钱雨——能让他们从公司中提取超出公司自身创造的财富。
事实上，由于"摩擦"成本，所有者赚到的钱必然少于企业赚到的钱。这正是我要说的：这些成本目前正在以极大的数额发生，导致股东未来的收益将远低于历史水平。
为了理解这种费用是如何膨胀的，不妨设想一下：所有美国公司现在和将来都由同一个家族拥有。我们姑且称他们为盖特洛克家族（Gotrocks）。在缴纳股息税后，这个家族一代一代地变得更富有，累积的财富正好等于他们所拥有的公司赚到的总和。如今这个数字每年大约为 7000 亿美元。当然，家族会花掉其中一部分钱。但他们储蓄的那部分会持续复利增长，为家族创造利益。在盖特洛克家里，每个人以同样的速度变富，一切和谐美满。
但现在我们假设，几个巧舌如簧的“帮手”找上门来，说服家族中的每个成员，让他们试图通过买卖彼此持有的股份来“智胜”自己的亲戚。这些帮手（当然，要收费）乐意为他们处理这些交易。盖特洛克家族仍然拥有整个美国企业界；交易只不过重新安排了谁拥有什么。因此，家族每年的财富增长减少了，等于美国企业的利润减去支付的佣金。家族成员交易得越多，他们分到的蛋糕就越小，而帮手们拿走的份额就越大。这些经纪帮手们对这一事实心知肚明：对他们而言，交易活动就是朋友，他们会用各种方式怂恿家族多做交易。
过了一段时间，大多数家族成员意识到，在这场新式的“打败我兄弟”游戏里，他们干得并不怎么样。于是第二类帮手登场了。这些新来者向盖特洛克家族的每个成员解释说，单靠他自己永远不可能胜过家族里的其他人。他们给出的解决办法是：“雇一个经理——没错，就是我们——用专业的方式替你搞定。”这些经理帮手继续使用经纪帮手来执行交易；他们甚至可能增加交易活动，好让经纪人也赚得更多。整体而言，现在蛋糕中有更大的一块分给了这两类帮手。
家族的失望感与日俱增。每个成员如今都在雇佣专业人士。但总体而言，家族的财务状况反而恶化了。解决办法是什么？当然是寻求更多帮助。
帮助以财务规划师和机构顾问的形式出现，他们介入进来，就如何挑选经理帮手向盖特洛克家族提供建议。困惑的家族欣然接受了这种援助。这时候家族成员已经知道，他们既不会选股票，也不会选股票经理。那么有人可能会问：凭什么他们就能指望选对顾问呢？但盖特洛克家族从没想过这个问题，而顾问帮手们也当然不会提醒他们。
盖特洛克家族现在供养着三类昂贵的帮手，发现自己的结果越来越糟，陷入了绝望。但就在希望似乎要破灭时，第四类人——我们姑且称之为“超级帮手”——出现了。这些友善的人向盖特洛克家族解释说，之所以结果不令人满意，是因为现有的帮手（经纪人、经理、顾问）动力不足，只是在走过场。这些新帮手问道：“你指望一群行尸走肉干出什么来？”
新来者给出了一个简单得惊人的解决办法：多付钱。这些超级帮手自信满满地声称，家族成员要想真正胜过自己的亲戚，除了固定的高额费用之外，还必须支付数额巨大的或有报酬（ contingent payments ）。
家族中较有观察力的成员发现，有些超级帮手其实就是换了新制服的经理帮手，制服上缝着花哨的名字，比如“对冲基金”或“私募股权”。然而，这些新帮手向盖特洛克家族保证，这身行头的改变至关重要，它能赋予穿着者神奇的力量，就好比温和的克拉克·肯特换上超人制服后获得的力量。听完这番解释，家族安心了，决定付钱。
这就是我们现在的处境：如果所有股东都老老实实坐在摇椅里不动，本该全部归他们的盈利中，创纪录的比例如今流入了不断壮大的帮手大军。尤其昂贵的是最近流行的利润分成安排——在这些安排下，帮手们聪明或运气好时拿走赢利的大头，而当他们愚蠢、运气差（偶尔还搞点猫腻）时，却让家族成员承担全部损失，外加高昂的固定费用。足够多的这类安排——正面，帮手拿走大部分赢利；反面，Gotrocks家族亏钱，还要为这个资格付出高昂代价——或许把这家族改称为Hadrocks家族更贴切。事实上今天，家族承担的各种摩擦成本，很可能已占到美国企业盈利的20%。换句话说，支付帮手的负担，可能导致美国股票投资者整体只能赚到他们原本收益的80%左右——如果他们只管坐着不动、谁的也不听的话。
很久以前，艾萨克·牛顿爵士提出了三大运动定律，这是天才之作。但牛顿爵士的才华没有延伸到投资领域：他在南海泡沫中亏了一大笔钱，后来解释说：“我能计算天体的运行，但无法计算人类的疯狂。”如果他没被这次损失吓出心理创伤，牛顿爵士很可能还会发现第四运动定律：对投资者整体而言，回报随着运动增加而减少。
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以下是本节开头问题的答案：具体来说，道指在20世纪从65.73点涨至11,497.12点，年复合增长率为5.3%（当然投资者还能收到股息）。要在21世纪实现同样的增长率，道指必须在2099年12月31日涨到——请坐稳——正好2,011,011.23点。不过我满足于2,000,000点就行了；本世纪已过去六年，道指却一点没涨。
债务与风险
随着我们合并MidAmerican，新的资产负债表可能暗示伯克希尔扩大了借贷容忍度。但事实并非如此。除了象征性的少量债务，我们回避借款，只在三种情况下才会举债：
1）我们偶尔使用回购协议作为某些短期投资策略的一部分，这些策略包含持有美国政府（或机构）证券。这类购买高度机会主义，只涉及最具流动性的证券。几年前我们做过几笔有趣的交易，后来都已平仓或自然到期。相应的负债也已大幅削减，不久可能归零。
2）我们针对自己理解风险特征的利息应收款组合进行借款。2001年我们曾这样做：与Leucadia合伙接管破产的Finova（持有广泛应收款），我们为56亿美元银行债务提供担保。那笔债务已全部偿还。最近，我们借款来资助由Clayton管理的一个高度分散、表现可预测的制造房屋应收款组合。另一种做法是“证券化”——即出售这些应收款——但保留服务权。如果采用行业常见的这种流程，我们资产负债表上就不会出现这些债务，同时报告的盈利也会提前确认。但最终，我们赚的钱会更少。如果市场变量变化使证券化更有利（这不太可能），我们可以出售部分组合并消除相关债务。在此之前，我们宁愿要更好的利润，而不是更好的粉饰。
3）MidAmerican有大量债务，但那只是该公司的债务，尽管会出现在我们的合并资产负债表上，伯克希尔并不为其担保。
尽管如此，这些债务无疑是安全的，因为用于偿付利息的是中美能源（MidAmerican）旗下多元且高度稳定的公用事业收益。即便某个意外事件重创了中美能源的一家公用事业公司，其他公司的收益也完全足以覆盖全部债务需求。更何况，中美能源将所有收益留存——这种积累股权的做法在公用事业领域极为罕见。
从风险角度看，拥有十家多元且互不关联的公用事业公司、其收益以例如2:1的比率覆盖利息，远比仅靠一家公用事业公司提供更高倍数的覆盖要安全得多。一场灾难性事件足以让一家单一公用事业公司破产——看看卡特里娜飓风对新奥尔良当地电力公司做了什么——无论其债务政策多么保守。而一场地理性的灾难——比如西部某州的地震——对中美能源不可能产生同样的影响。就连像查理这样爱操心的人也想不出有什么事件会系统性地大幅降低公用事业收益。正因如此，凭借其监管收益日益广泛的多样性，中美能源未来仍将大量使用债务。
就这些了。我们无意在伯克希尔为了收购或运营目的而承担任何重大债务。当然，传统的商业智慧会辩称我们过于保守，声称如果在我们的资产负债表上适度引入杠杆，就能安全赚取更多利润。
或许如此。但伯克希尔的数十万投资者中，有相当多的人将大部分身家押在我们的股票上（需要强调的是，其中也包括我们大量董事和核心管理层），公司的一场灾难对他们而言就是一场灾难。此外，还有一些人因我们而永久受伤，我们需要向他们支付长达五十年甚至更久的保险赔款。对这些群体以及其他相关方，我们承诺了绝对的安全保障，无论发生什么：金融恐慌、证券交易所关闭（1914年就发生过一次长期停市），甚至国内核、化学或生物攻击。
我们很乐意承担巨大风险。事实上，我们比任何其他保险公司都更愿意承保与单一巨灾事件挂钩的高限额保单。我们还持有一个庞大的投资组合，其市值在某些条件下可能会急剧快速下跌（如1987年10月19日发生的那样）。但无论发生什么，伯克希尔都有足够的净资产、盈利能力和流动性来轻松应对。
任何其他做法都是危险的。多年来，许多非常聪明的人用惨痛教训学到：一长串令人印象深刻的数字乘以一个零，结果永远是零。这个等式我可不想亲身体验其后果，更不愿因我的行为而让别人承担其惩罚。
管理层继任
作为所有者，你们自然关心：我是否会在能力衰退后仍坚持担任CEO，如果是这样，董事会将如何处理这个问题。你们还想知道如果我今晚就去世，会发生什么。
第二个问题很容易回答。我们众多子公司大多拥有强大的市场地位、显著的动力和出色的管理者。伯克希尔独特的企业文化已深深植根于我们的各个子公司中，这些业务不会因为我离世而受到丝毫影响。
而且，伯克希尔有三位经理人，年纪都还不大，完全有能力担任首席执行官。他们三位中任何一位，在管理工作的某些方面都比我强得多。不足之处是，他们中没人有我这套跨界的经验——既能自如地在商业领域做决策，也能在投资领域游刃有余。这个问题可以通过让组织里另一个人负责管理市场证券来解决。在伯克希尔，这是个有趣的工作，新CEO要找一位有才华的人来做这件事毫无问题。事实上，我们在GEICO（政府雇员保险公司）就是这么做的，26年来成果斐然。
伯克希尔的董事会已经充分讨论过三位CEO候选人，并且一致同意，如果今天就需要找接替我的人，应该选谁。董事们随时关注这件事，也会根据情况变化调整看法——新的管理明星可能冒出来，现有的人也会变老。重要的是，董事们现在就知道——将来也永远知道——当需要时他们该怎么做。
另一个必须面对的问题是：如果这种需要不是来自我的去世，而是来自我的衰退——尤其当这种衰退伴随着我自欺欺人地以为自己的管理水平又创新高时——董事会是否准备好做出改变？这个问题不是我个人独有的。查理和我时不时在伯克希尔的子公司里碰到这种情况。人类衰老的速度千差万别——但才能和精力迟早会下降。有些经理人到80多岁依然高效——查理82岁还神采奕奕——而另一些人在60多岁就明显衰退了。当他们的能力衰退时，自我评估的能力通常也随之衰退。这时候往往需要别人来吹哨叫停。
当那一天来临，我们的董事会必须承担起这个责任。从财务角度看，董事们有非同寻常的动力去这样做。我找不出国内还有哪一家公司的董事会，其董事的经济利益与股东利益如此完全一致。很少有董事会能接近这个水平。然而，从个人情感层面来说，对大多数人而言，告诉别人（尤其是朋友）他不再胜任，是极其困难的。
不过，如果我成了那个需要接收这条消息的人，我们的董事会这么做反而是帮了我的忙。我持有的每一股伯克希尔股票最终都会捐给慈善机构，我希望社会能从这些捐赠和遗赠中获得最大好处。如果因为我的同事们逃避责任（我希望是温柔地）请我走人，导致我持股的慈善潜力打了折扣，那将是一场悲剧。但别担心。我们有一群出色的董事，他们永远会做对股东有利的事。
说到这个话题，我感觉棒极了。
年度股东大会
今年的年会将于5月6日（星期六）举行。照例，Qwest中心早上7点开门，8点半播放最新的伯克希尔电影。9点半我们直接进入问答环节（中午在Qwest的摊位休息用餐），一直持续到下午3点。然后短暂休息后，下午3点15分，查理和我召开正式年度会议。这个时间安排去年效果很好，让想参加正式会议的人得以参加，也让其他人可以自由购物。
去年你们在这方面贡献卓著。毗邻会议区的19.43万平方英尺展厅摆满了伯克希尔子公司的产品，2.1万名参会者让每个展位都创下了销售纪录。凯莉·布罗兹（娘家姓穆什莫尔），伯克希尔自己的"齐格飞"[注1]，一手操持这场购物盛宴和年会本身。参展商喜欢她，我也一样。凯莉十月结婚了，是我带她走过红毯。她问我想在婚礼节目单上怎么写，我回答："羡慕新郎的那位。"于是就这么印了出来。
今年我们将展出两套克莱顿房屋（配以阿克米砖、肖地毯、佳斯曼维尔保温棉、MiTek紧固件、无忧遮阳篷和NFM家具）。你会发现，这些定价7.9万和8.9万美元的房子物超所值。事实上，去年就有三位股东深以为然，当场买下了我们当时展出的那套11.9万美元的样板房。克莱顿房屋两侧，森林河房车也将登场。
GEICO将设展台，由全国各地的顶尖顾问坐镇，随时准备为你提供车险报价。大多数情况下，GEICO能给你特殊的股东折扣（通常8%）。在我们经营的50个司法管辖区中，有45个允许这项特惠。（补充一点：如果你符合其他折扣条件，比如某些团体优惠，这个折扣不能叠加。）带上你现有保险的详细信息，看看我们能否帮你省钱——我相信至少对你们当中的一半人来说可以。顺便，可以申请新的GEICO信用卡，我现在就用这个。
周六，在奥马哈机场，我们将照例展出NetJets®系列飞机供你参观。先去Qwest中心的NetJets展台了解如何观看这些飞机吧。乘大巴来奥马哈，开你自己的新飞机回去。
Qwest中心的"书虫"精品店去年卖伯克希尔相关书籍创下了纪录。令人惊叹的是，其中3500册是我搭档的智慧结晶《穷查理宝典》。这意味着每9秒就卖出一本。理由充分：你找不到哪本书有这么多实用智慧。口口相传之下，查理的初版2.05万册已售罄，因此我们将在年会上推出修订增补版。去年"书虫"出售的其他22种图书和DVD中，有4597册/张售出，总金额8万4746美元。我们的股东简直是书店老板的梦想。
随信附上的股东委托材料中有一份附件，说明如何获取参加年会及其他活动的入场凭证。至于飞机、酒店和汽车预订，我们再次与美国运通（800-799-6634）签约，为您提供特别帮助。负责此事的卡罗尔·佩德森每年都为我们做得非常出色，我在此感谢她。
内布拉斯加家具城位于第72街（道奇街与太平洋街之间）占地77英亩的场地，我们将再次推出"伯克希尔周末"定价。我们九年前在NFM首次推出这一特惠活动，"周末"期间的销售额从1997年的530万美元增长到2005年的2740万美元（比上年增长9%）。光是想着这个销量，我就激动得起鸡皮疙瘩。
[注1]：弗洛·齐格飞（Flo Ziegfeld），美国著名歌舞剧制作人，以华丽演出闻名，此处比喻凯莉是伯克希尔的"总导演"。
想要享受折扣，您必须在5月4日（周四）至5月8日（周一）期间购物，并出示参会凭证。这一特价时段甚至适用于几家知名制造商的产品——这些厂商通常有铁板钉钉的不打折规定，但为了迎合我们的股东周末，破例为你们开了绿灯。我们感谢他们的配合。NFM（内布拉斯加家具城）周一至周六营业时间为上午10点至晚上9点，周日为上午10点至下午6点。今年周六下午5点30分至8点，我们将为股东举办一场专场活动。我会到场，吃烧烤、喝可乐、数销量。
博希姆珠宝（Borsheim's）今年将再次举办两场股东专属活动。第一场是5月5日（周五）晚上6点至10点的鸡尾酒招待会。第二场是主庆典，于5月7日（周日）上午9点至下午4点举行。周六我们将营业至下午6点。
整个周末博希姆都会人潮涌动。为了方便您购物，股东优惠价将从5月1日（周一）延续至5月13日（周六）。在此期间，您只需出示参会凭证或券商账单确认股东身份即可享受优惠。
博希姆的毛利率即便在股东折扣之前，也比其主要竞争对手低整整20个百分点。去年，我们的股东周营业额较2004年增长了9%，而前一年已实现了73%的增长。店里卖出了5000套伯克希尔大富翁游戏——然后卖断了货。我们吸取了教训：今年会备足库存。
在博希姆外的帐篷里，两次美国国际象棋冠军帕特里克·沃尔夫（Patrick Wolff）将蒙眼同时迎战六人组的挑战。此外，我们还有两位世界顶级桥牌高手——鲍勃·哈曼（Bob Hamman）和莎伦·奥斯伯格（Sharon Osberg）——将在周日下午与股东们切磋牌技。他们打算睁着眼睛打——但鲍勃从不理牌，哪怕是在全国锦标赛上也不例外。
戈拉特牛排馆（Gorat's）——我最喜欢的牛排馆——将在5月7日（周日）再次只为伯克希尔股东开放，营业时间从下午4点到晚上10点。请记住，当天来戈拉特必须提前预订。预订电话：402-551-3733，请于4月1日（当天）拨打（不要提前）。
本学年，约有35个大学班级将来奥马哈与我座谈。我几乎全部招待——总共大约2000名学生——去戈拉特吃午饭。他们很享受。想知道为什么？周日来和我们一起吧。
周六下午4点到5点30分，我们将再次为来自北美以外的股东举办一场专场招待会。每年我们的年会都吸引着全球各地的人，我和查理希望能亲自迎接那些远道而来的朋友。去年我们很高兴见到了来自几十个国家的400多位股东。任何来自美国或加拿大以外的股东都将获得一份特别凭证和参加该活动的说明。
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查理和我无比幸运。我们出生在美国；拥有出色的父母，他们让我们接受了良好的教育；享有美满的家庭和健康的身体；并且天生具备"商业"基因，使我们的财富增长远超其他对社会福祉贡献同样甚至更多的人。此外，我们长久以来都从事着自己热爱的工作，每天被才华横溢、乐观向上的伙伴们以无数方式帮助着我们。难怪我们跳着踢踏舞去上班。但对我们而言，没什么比在伯克希尔年会上与你们——我们的股东合伙人——欢聚一堂更开心的事了。所以，5月6日请来Qwest中心参加我们的"资本家伍德斯托克"年度盛会。我们到时见。
2006年2月28日
沃伦·E·巴菲特
董事会主席